Debt consolidation programs: 4 things to know before enrolling
Credit card debt has become a massive issue for Americans over the last few years — and that problem is compounding rapidly, according to recent data. As of the fourth quarter of 2024, cardholders owed a collective $1.21 trillion on their credit cards — signaling a new record high and an increase of $45 billion from the prior quarter. Serious credit card delinquencies have been climbing, too, indicating that more and more Americans are struggling to keep up with their debt obligations amid other economic issues.
If you're one of the many who's been struggling to keep up with multiple credit card payments each month, you may have come across debt consolidation programs as a possible solution to your mounting credit card issues. The goal of these programs is similar to traditional debt consolidation: combining multiple debts into one loan with a lower interest rate and a single monthly payment. That allows you to pay less interest and more easily manage your monthly payments.
However, debt consolidation programs operate quite differently than traditional debt consolidation, and they come with their own set of rules and requirements. So, while a debt consolidation program can still be a good solution for the right borrowers, learning what these differences are is an important step to take before signing up.
Find out what credit card debt relief strategies are available to you here.
Debt consolidation programs: 4 things to know before enrolling
Here are a few things to know if you're trying to decide whether a debt consolidation program is right for you:
The lending parameters are more flexible – but there's still a bar to clear
If you've been turned down for traditional debt consolidation loans due to a few minor credit issues or a high debt-to-income (DTI ratio, you might have better luck with a debt consolidation program. These programs, which are offered by debt relief companies, typically partner with third-party lenders who specialize in helping borrowers with less-than-perfect credit histories. For example, while a traditional bank might require a credit score of 680 or higher, some debt consolidation programs may accept scores in the low 600s.
However, don't mistake the more flexible lending parameters as guaranteed approval. You'll still need to demonstrate some level of creditworthiness and stable income to qualify. These programs typically look for borrowers who have hit a rough patch but show potential for recovery — not those in severe financial distress who might be better candidates for debt settlement or bankruptcy.
Learn more about debt consolidation programs today.
Interest rates may be higher than traditional loans – but still better than your cards
When you enroll in a debt consolidation program, you should expect to see interest rates that are higher than what you'd get from a traditional bank loan. This reflects the increased risk these specialized lenders take on by working with borrowers who have credit challenges. Rates differ among lenders and are based on your credit and borrower profile, of course, but in general, you may pay slightly more than you would if you borrowed directly from a lender.
That said, these debt consolidation loan rates are usually still significantly lower than the average credit card interest rate, which currently hovers around 23% — a record high. So, if you're carrying balances on multiple cards, consolidating through one of these programs could still result in meaningful savings.
The repayment process may not be what you'd expect
In most debt consolidation programs, you won't make payments directly to the lender. Instead, you'll typically make your monthly payments to the debt relief company, which then handles the distribution of funds to your creditors.
This setup can have both advantages and disadvantages. On the plus side, it simplifies your payment process. You're making just one payment instead of juggling multiple creditors. However, it also means you're adding another layer between you and your debt repayment, which some borrowers find uncomfortable. So, make sure you understand exactly how payments will be handled and what happens if you need to adjust your payment date or amount.
Your credit card use may need to be paused
Most debt consolidation programs require you to close or stop using your credit cards while enrolled in the program. This requirement isn't just about controlling spending. It's designed to prevent you from accumulating new debt while paying off existing balances.
The program may even monitor your credit report for new accounts or increased balances, and opening new credit accounts or continuing to use existing cards could result in being dropped from the program. While this might seem strict, it's actually a helpful feature that forces you to break the cycle of credit card dependency and develop healthier financial habits.
The bottom line
Debt consolidation programs can be a valuable tool for the right borrower, who is typically someone who needs help managing multiple credit card payments and has decent but not perfect credit. But while these programs often offer more flexible qualification requirements than traditional loans, they come with their own set of rules and requirements that might not suit everyone.
Before enrolling, make sure you understand the complete picture: the interest rate you'll pay, how payments will be handled, what restrictions you'll face and what happens if you need to modify or exit the program. You should also be honest about whether you're ready to commit to the program's requirements. If you are, and the numbers make sense for your situation, a debt consolidation program could be your path to becoming debt-free.
