Credit Card Consolidation vs Debt Consolidation What’s the Difference
When people start to feel overwhelmed by the total balances on their monthly bills or feel like they are barely able to afford the minimum monthly payments, they start to wonder if there is any possible relief. Debt consolidation and credit card consolidation are solutions that help pay off multiple balances by combining them into a streamlined monthly payment.
Credit card consolidation typically involves paying off your existing credit card debt with a new, lower-interest loan or credit card that saves you money by offering a more manageable monthly payment or providing a shorter payoff period.
General debt consolidation doesn’t differ significantly. It involves the same long-term strategy of lowering monthly expenses, shortening the length of the loans, and restoring financial well-being. But this solution can include bringing multiple forms of debt such as medical bills, car loans, personal loans, and credit card balances under one roof. Although the differences may seem subtle, you should conduct the proper due diligence and be sure you understand the general pros and cons before signing off on a debt or credit card consolidation solution.
What is Credit Card Consolidation?
The fundamental idea behind credit card consolidation strategies involves taking multiple accounts and funneling them into one that offers a reasonably lower interest rate. By moving one or more credit card balances under one payment roof, borrowers gain monthly income advantages. People who feel swamped with rising interest and fees typically employ one of the following credit card consolidation strategies.
- Low-Rate Credit Card: Sometimes referred to as credit card refinancing, this strategy involves transferring balances to a low-interest credit card.
- Personal Loan: Flexible unsecured personal loans are another common solution for credit card consolidation. This strategy proves successful when borrowers can secure loans with interest rates lower than what their credit card companies charge. Credit unions typically offer fast, local decision-making, so you can rest easy knowing you can have access to your money quickly.
- Home Equity Loan: Leveraging the equity in your home often proves to be one of the best ways to secure a low rate and preferable repayment terms. That’s largely because home equity loans are secured by property and lenders take significantly less risk than unsecured products.
- Debt Management Plan: This strategy rolls multiple debts into one monthly installment at a lower interest rate. In terms of a credit card consolidation option, people with low credit scores often use debt management plans as a fallback position because they typically come with startup and monthly fees, as well as additional restrictions to ensure payments stay on track.
It’s essential to understand that no one-size-fits-all credit card consolidation solution exists. People usually have unique portfolios, revenue streams, and long-term goals. By working with America's Credit Union, members can find a solution that best meets their needs. Although finances differ from person to person, there are general pros and cons to each option.
Credit Card Consolidation Pros and Cons
Entering a credit card consolidation plan should not be taken lightly. Some of the seemingly viable solutions have unforeseen pitfalls. While employing the right solution to deal with your outstanding debt can save you money upfront, it’s crucial to conduct thorough due diligence. These rank among the pros and cons worth considering:
- Interest Rates and Triggers: Leveraging promotional credit cards that offer zero percent interest periods presents a unique opportunity. On the positive side, people who completely pay off balances during the introductory periods can save a great deal on interest. On the other side of the coin, some credit cards charge high-interest rates and fees after the grace period expires. As a result, users can be in a worse situation if they don’t pay off the transferred balances. Before deciding on a card, be sure you compare credit card rates after the introductory period ends make sure you get the best card for your budget.
- Credit Score Questions: People with higher credit scores can typically get approved for a debt consolidation loan such as a home equity loan, personal loan, or credit card. People with middle-of-the-road to low credit scores are not necessarily going to be approved by all lenders. This may cause borrowers to shoulder unenviable repayment schedules and pay excessive fees.
- Secured vs Unsecured Loans: The upside to utilizing a secured loan option such as a home equity loan is that qualified borrowers typically enjoy access to low-interest products. But using a home as collateral can be risky if the borrower is not confident about timely repayment. Unsecured loans, such as a personal loan, may feature slightly higher rates since no collateral (such as a home) is on the line if the loan isn’t paid back, but the peace of mind and fast turnaround may be worth it.
Each credit card consolidation strategy comes with pros and cons. Matching the right option to your financial situation is necessary for success.
What is Debt Consolidation?
Debt consolidation strategies remain remarkably similar to credit card solutions. The fundamental idea is to roll wide-reaching debts into one monthly payment. The most significant difference between credit card consolidation and general debt consolidation stems from the type of accounts brought together. Debt consolidation isn’t just for credit cards. It usually also includes auto loans, medical bills, personal loans, and educational expenses just to name a few.
People who feel overwhelmed with debt usually employ one of two general solutions. The first involves taking out a relatively low-interest credit card with a high limit. The credit card can be used to pay off the other outstanding debts, effectively transferring them into one account and monthly payment. The second strategy involves securing a low-interest loan from a local lender.
Available loan products can range from leveraging home equity with a home equity loan or qualifying for an unsecured personal loan. At the end of the day, wide-reaching debts can be consolidated into one manageable monthly installment, saving you money and time.
Debt Consolidation Pros and Cons
Putting a debt consolidation solution to work can result in saved money, reduced stress, increased access to cash-on-hand, and improved quality of life. These pros are generally driven by intelligent money management and proactive measures. For instance, people are often best served by working with a loan specialist before debts exceed 50 percent of their gross monthly income. Acting decisively allows people to take advantage of opportunities before their credit scores decline further.
It’s also advisable to move forward with a debt consolidation plan before missing monthly payments. The conventional wisdom is that if a borrower can make multiple monthly payments at a high-interest rate, that person can obviously handle one that uses less of their gross revenue.
The biggest negative regarding debt consolidation has nothing to do with the loan products. It stems from borrowers not changing their spending habits. Racking up credit cards or buying a new automobile after utilizing a debt consolidation solution can prove extremely counterproductive.
Is Credit Card Consolidation or Debt Consolidation Right For You?
Knowing whether the credit card consolidation or debt consolidation strategy is right for you can be highly subjective. No two people possess precisely the same financial portfolio or long-term goals. It may be worthwhile to start by looking at tools such as ACU's Credit Card Pay Off Calculator to see what it will take to pay off your balances and what you can do to meet your repayment goals, as well as our Personal Debt Consolidation Calculator designed to help you determine your new monthly payment if you decide to consolidate your debt.
People considering consolidation should also request a free copy of their credit report from the three major reporting organizations — Equifax, Experian, and TransUnion. It’s important to review the reports and correct any errors as soon as possible. This helps ensure your credit score is the best it can be, putting you in the prime borrowing position.
If you’re ready to consolidate your debt with a home equity loan, personal loan, or credit card but would like a second opinion on the best solution for your financial situation, please contact America's Credit Union.
For more details on if credit card consolidation or debt consolidation is right for you, review our "Debt Consolidation: Expectations vs. Reality" complete guide!
Membership in America’s Credit Union is open to anyone who lives or works in Dallas, Rockwall or Collin Counties, Texas, and their family members. Employees of select employers may also be eligible. See our Membership page for details.