Is debt consolidation a good way to get out of credit card debt?

Despite inflation cooling and interest rates starting to fall, many Americans are still feeling the pressure from the higher costs of everyday goods and services. Over the last couple of years, inflation pushed the prices of groceries, gas and housing higher, stretching budgets thin, and even with recent improvements, it's still a tough time to carry credit card debt. That's because credit card interest rates are sitting at a record-high average of nearly 23%, making it difficult to pay off what's owed. 

In these situations, debt consolidation can seem like a lifeline. Credit card debt consolidation involves rolling multiple debts into one new loan with a new interest rate and a single monthly payment. The goal is to make the debt more manageable, reducing the interest rate and monthly payment to help you pay off the balance faster. That can seem like a simple solution to an otherwise overwhelming problem, but it's important to understand that not every debt relief option works for every situation. 

So, is debt consolidation a good way to get out of credit card debt? Below, we'll detail what you should know.

Is your credit card debt out of control? Find out how to tackle it here.

Is debt consolidation a good way to get out of credit card debt?

Debt consolidation can be an effective strategy for getting out of credit card debt — particularly if you're struggling with multiple high-interest debts. By consolidating your card debt into one loan with a lower interest rate, you could significantly reduce the amount of money you pay over time. 

For example, let's say you're currently paying 23% interest on several credit cards. By consolidating into a loan with a 12% or 15% interest rate, you could save a considerable amount on interest charges alone in the long run. Plus, managing one monthly payment instead of several can streamline your finances and reduce the likelihood of missed payments.

In general, debt consolidation makes the most sense for cardholders with stable incomes who can afford to make consistent payments on the new loan. If you're committed to paying down your debt and not charging more to your credit cards, it can help you achieve financial stability faster. 

However, it's not the right solution for everyone. Not all borrowers will qualify for a loan with a lower interest rate. In such cases, debt consolidation may not save any money and could potentially make the situation worse. Debt consolidation also doesn't address the underlying habits that led to high debt in the first place. 

Explore the debt relief strategies that could help with your card debt now.

Who should consider debt consolidation?

Debt consolidation might be the right option if:

• You have high-rate credit card debt: The higher the interest rates you're paying now, the more likely you'll benefit from consolidating your debt into a lower-interest loan.
• You have good credit: If you have a FICO score of 670 or higher, you'll likely qualify for lower rates on a loan, making consolidation more cost-effective.
• You can commit to not using your credit cards: To avoid falling into the same debt trap, you must stop using your credit cards while you pay down the consolidated loan.
• You want to simplify your payments: If keeping track of multiple due dates and payments is overwhelming, consolidating can make your financial life simpler by creating just one monthly payment.

Who should avoid debt consolidation?

Debt consolidation might not be ideal if:

• Your credit score is too low: If you can't qualify for a better rate than you're currently paying, consolidating could do more harm than good.
• You have a small amount of debt: If your debt is manageable, other debt relief strategies might make more sense.
• You're struggling with income instability: If your financial situation is uncertain and you're worried about making payments, you might benefit more from credit counseling or other forms of debt relief, such as debt settlement.

Debt consolidation alternatives to consider

If debt consolidation isn't the right fit for you, there are several other options for tackling credit card debt, including:

• Balance transfers: Balance transfer cards offer 0% interest for an introductory period, typically 12 to 18 months. If you can pay off your balance during this period, you can avoid paying interest completely. However, balance transfers often come with fees, and once the introductory period ends, the interest rate can spike.
• Debt management: A debt management program can help you create a plan for repaying your debt and could also result in lower interest rates or fees being negotiated on your behalf.
• Debt forgiveness: If you can't afford to make the minimum payments, debt forgiveness (or debt settlement) allows you to negotiate with creditors to pay less than what you owe. However, there are credit score and tax repercussions to consider, too.

The bottom line

Debt consolidation can be a powerful tool for those struggling with high-interest credit card debt, but it's not the only option. Before making a decision, it can help to consider your financial situation carefully and explore alternatives that may better suit your needs. While you may find that consolidating your debt is the best route, in certain cases, like if your credit score is low or your income is stable, you may determine that another debt relief option makes more sense.