Americans are carrying more credit card debt than ever, and lenders have noticed.
Applications for debt consolidation loans climbed sharply over the past year, according to industry tracking data, as households look for a way to stop juggling multiple balances at rates that can top 25 percent.
The pitch is simple: roll several high-interest debts into one fixed-rate loan with a single monthly payment.
For borrowers with decent credit, that can mean trading a 24 percent card rate for a personal loan in the 12 to 16 percent range.
On $10,000 of debt, the difference in interest can run into the thousands over a few years.
But the math only works if you actually stop swiping.
Many borrowers consolidate, feel relief, then run the cards back up within a year.
Now they owe the loan and the plastic, which is worse than where they started.
Financial counselors say this is the single most common way consolidation backfires.
Some lenders charge origination fees of 1 to 8 percent, quietly baked into the loan amount.
A 6 percent fee on a $15,000 loan means you are really borrowing $15,900.
Compare the annual percentage rate, not the advertised interest rate, because the APR captures fees.
Stretching a $12,000 balance over seven years can lower the monthly payment while raising the total interest you pay.
A shorter three- or four-year term usually costs less overall, though it demands a bigger check each month.
Home equity is another route some homeowners consider.
A HELOC or home equity loan often carries a lower rate, but it swaps unsecured debt for debt tied to your house.
Miss payments and the risk shifts from a bad credit score to a foreclosure filing.
Before signing anything, check whether a nonprofit credit counseling agency can negotiate lower rates through a debt management plan.
These are typically free or low cost, and they show up on your credit report differently than a loan.
Also pull your free credit reports at AnnualCreditReport.com and dispute any errors, since mistakes can push you into a higher rate tier.
If you do apply, get quotes from at least three lenders within a short window.
Rate shopping for loans generally counts as one inquiry if done inside a two-week period, so it will not tank your score.
Credit unions often beat big banks on rates for members.
One more caution: anyone promising to wipe out debt for an upfront fee is running a scam.
Legitimate consolidation means borrowing money and repaying it, full stop.
Our take: a consolidation loan is a tool, not a rescue.
It can save real money for disciplined borrowers who close or freeze the old cards and stick to a payoff plan.
Final Thoughts
For everyone else, it just moves the problem to a new account with a nicer name.