How Credit Card Debt Consolidation Works

Key Takeaways
  • Consolidating credit cards can simplify repayment and save thousands of dollars in interest payments.
  • You can often repay large amounts of debt within three to seven years.
  • Transferring balances to a loan provides a fixed rate, term, and monthly payment.
  • Personal loans do not require collateral.

Having credit card debt spread over multiple accounts can make it challenging to organize your finances and get out of debt. You must manage different payment amounts and due dates, along with the challenge of choosing the most effective payoff strategy.

Should you start by paying off the account with the lowest balance or lowest interest rate? How much extra can you pay toward reducing the balance each month? How long will you need to live on a shoestring for success?

Debt consolidation does not require you to tackle debts one bill at a time. If you qualify, you can roll all the balances into a single account and repay the loan as you would a car payment. Paying a monthly amount that does not change makes it easier to budget and successfully pay off the balance.

But not all debt consolidation options work the same way or offer the same benefits. Below are the details you need to know about how credit card debt consolidation works.

How Credit Card Debt consolidation Works

Credit cards are particularly challenging to repay. The line-of-credit feature makes it easy to pay down the balance a little and then charge everyday purchases up to the maximum limit. As time goes by, it can feel like you will die with mountains of debt because you cannot manage to get them paid off.

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To make matters worse, the creditor charges double-digit interest, compounded daily, creating outrageous interest charges. Then they require a minimum payment that barely covers the interest, leaving you guessing how much you would need to pay to eliminate the balance.

Credit card debt consolidation loans make it easy. The new loan pays off old credit card balances. Then the lender charges a fixed rate, compounded monthly over a set term. Paying the minimum amount due will eliminate the debt between one and seven years, depending on the loan. No guesswork required.


Secured Or Unsecured Loans? You can borrow money against your home or another asset, using your property as security for the debt. Doing so reduces interest charges and often allows you to extend payments for up to 30 years.

However, if debt elimination is your goal, repaying a new loan over three decades may not be in your best interest. The other major issue with secured debt is that if for any reason you are unable to make the payment, the bank can take your property.

Unsecured loans only extend payments for a few years, getting you out of debt faster without putting your property at risk. And while you may not qualify for single-digit interest, you could still save thousands of dollars in interest and shorten the debt payoff time frame.

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How You Save Money: Unsecured loans typically include an origination fee and charge simple interest on the outstanding balance. The rate offered is dependent on the quality of your application. If you have excellent credit, you could receive a rate of 10% or below. In contrast, lower credit scores may not lower the rate much.

Regardless of the rate received, due to the compounding schedule and the shorter term, you could still save a substantial amount on interest and get out of debt within a few years.