Credit Card Consolidation Programs

Credit card consolidation may occur through a consolidation loan program or through a debt management plan by way of a credit counseling program. Both of these methods eliminate multiple payments, allowing you to make one monthly payment each month. You must understand the differences between the two, however, as well as the effect that these programs will have on your credit report to make a choice.

Consolidation Loans

Usually, a consolidation loan requires collateral, such as your house. The loan is then applied to your credit card debts, effectively bringing your balances to zero. As a result, you make one monthly payment to the consolidation loan. Because the consolidation loan wipes out your balances, it frees your credit, which may be tempting for those who aren't fully committed to paying off debt.

Debt Management Plans

Another way of consolidating your loans is through a debt management plan. Your debt situation must be dire, however, to get on one of these consolidation plans. To qualify for a DMP, a credit counselor must recommend one for you. Recommendations are made for those who have already defaulted on their payments. Once you agree to a DMP, your counselor works with your creditors to negotiate lower interest rates and/or payoff balances. The counselor also comes up with a time frame, at the end of which your debt will be paid off. You then make one monthly payment to the credit counseling company. If the counseling company is late making your payments it reflects poorly on your credit report, so it's vital to choose a reputable one. The Federal Trade Commission recommends finding a credit counseling company through the National Foundation for Credit Counseling (see Resources).

Warnings

Both consolidation loans and debt management plans are looked upon negatively by lenders, and it may be difficult to obtain new credit in the future as a result. Consolidation generally reflects difficulty in repaying debt -- and in the case of DMPs, lenders must acknowledge that you weren't able to pay the full amount of your debt. Additionally, 70 percent of those who take on consolidation loans end up with the same or more debt within two years, according to an article on Bankrate. It's best to seek financial counseling to sort out a budget prior to taking on any type of consolidation.

Considerations

Consolidation loans are often advertised with very low interest rates, however, those rates are generally reserved for those with the best credit scores. You may find that the rates you are offered are not highly competitive with your current credit card interest rates. Before taking on a consolidation loan, which may make future borrowing difficult, call your creditors to ask for a lower interest rate. It's wise to collect any credit card offers you've received to have an idea of your target rate. If at first you are not successful, call another day and ask again.