Your 3 options when consolidating card debt

Know the differences between balance transfer, bank loan, debt management plan

Question Dear Credit Wise,
I have $6,000 in credit card debt. I would like to consolidate and pay only one monthly bill. How would I go about doing this and is it a good idea? -- Suzanne

Answer Dear Suzanne,
You have three basic options for consolidating credit card debt:

1. Transfer the balances to another credit card.
2. Take out a consolidation loan from a bank or credit union.
3. Enroll in a debt management plan from a credit counseling agency.

All options will do what you want in terms of paying only one monthly bill, assuming you do not use the cards for future purchases. And yes, I do believe it can be a good idea as long as you do your homework and choose the option that will work best for you.

If your credit is good, you should be able to qualify for a low or 0-percent interest rate balance transfer credit card. If so, you need to know that 0-percent interest doesn't come free. Most balance transfers will incur a transfer fee of 2 percent to 5 percent on each balance, which in your case would cost $120 to $300.

Also, most 0-percent interest offers are good for only 12 to 18 months. In order to pay off the debt within that time frame, your payments could be anywhere from $340 to $525 each month. To make this option work best for you, you need to know you can make those kinds of payments.

These cards are generally only offered to those with good credit. Of course, you can extend your payoff beyond the 0-percent promotional period by making smaller monthly payments, but make sure the default APR on the card is reasonable.

A consolidation loan from a bank or credit union will also depend on your credit. These loans will carry an interest rate, but what that might be will again depend on your credit standing and your relationship with your bank or credit union. Credit unions in particular offer some attractive rates to their clients and most are looking for new customers at any given time. Peer-to-peer consolidation loans are becoming popular, as well.

Both of these options will probably give you the option of leaving your cards open and available for use. My advice is always to pay off your debt and not take on any new debt while you are doing so, but this is information you should have before you make your decision. Remember if you choose to use the cards, you will effectively negate the value of having only one monthly bill to pay on your debts. You will also run the risk of increasing your debt.

The third option for consolidation is to enroll in a debt management plan through a nonprofit credit counseling agency. Your credit score will not be a factor with this option. However, this option will indeed close your accounts and that might negatively impact your credit score in the short term. Many factors go into credit scoring, however, and if your credit cards are at or close to their limit, the damage to your credit has already been done.

While on a DMP, you will also be strongly encouraged not to incur any new debt. The agency you choose to enroll with will likely charge a monthly fee and may also charge a one-time enrollment fee. These fees, however, are very reasonable and usually are more than offset by the interest savings you will realize on a DMP. While you will probably not get a 0-percent interest rate on any of the cards you enroll, you should see a reduction in the interest rate.

DMPs are set up to pay off your debt in five years or fewer. Because your debt is relatively small, your program time should be for a shorter period.

Another added benefit to working with a credit counseling agency is the education you will receive at no charge. Certified nonprofit agencies are required to assist you in formulating a budget and an action plan so you better understand your finances. Be sure to seek out a qualified, nonprofit agency, which you can find through the Financial Counseling Association of America or the National Foundation for Credit Counseling.

Be wise with your credit!

See related: Balance transfer survey: Offers more generousAvoid these 6 debt consolidation traps, 8 steps to picking a credit counselor

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Updated: 01-21-2019