How Does Credit Card Debt Consolidation Work?

If you're feeling overwhelmed by credit card debt, you might be wondering what your best option is for paying it down. Depending on your circumstances, you might be thinking of debt settlement, debt management, debt consolidation or even bankruptcy. Debt consolidation offers several advantages over other methods for eliminating debt. There are several things to consider before beginning the process of consolidating credit card debt.

Function

The primary function of credit card debt consolidation is to combine multiple credit card payments into a single monthly payment. In doing so, you are typically able to pay less each month in interest and fees. Consolidating your credit card debts also can help you to pay your debts down at a faster rate. Credit card consolidation is typically a good solution if you want to get rid of your debt while preserving your good credit.

Methods

There are several ways to consolidate your credit card debt. You can take advantage of zero or low-interest credit card balance transfers to move debt onto a single account. If you're a homeowner and have equity in your home, you can take out a home equity loan or line of credit to consolidate your credit card debt. You also can apply for a personal loan or unsecured line of credit to pay down credit cards.

Process

Once you've established your method for consolidating your debts, the next step is to contact your creditors to determine the payoff balance owed for each account. You then can draw from your loan or line of credit to pay each creditor in full. If you're transferring balances, you will need to provide your creditor with the billing information, account number and account balances of the account you're transferring. Once you've paid each account in full, you then need to decide whether to close the accounts or leave them open.

Misconceptions

Many consumers tend to think of debt consolidation, debt management and credit counseling as the same process. Typically, debt management and credit counseling involve consolidating your debts through a third-party company. You make one payment to the credit counselor or debt management company, which then distributes it to your creditors. The third-party company might negotiate a waiver of fees or a lower interest rate, although your creditors are not required to do so. Debt management companies also might charge an upfront fee as well as a monthly service fee for their services.

Considerations

If you're planning to use the equity in your home to secure a line of credit, you should be aware that if you fail to repay the loan, you risk losing your home. The same applies if you're using the equity in your vehicle to back a loan. You also should consider the implications that shifting your debt and closing credit card accounts might have on your credit score. In addition, if you plan on using your credit cards again, consolidating them could lead you further into debt.