Should I Consolidate My Credit Cards?

Another thing to consider when you're thinking about consolidating credit cards with balance transfers is how you're impacting your overall credit rating. Consolidating your revolving debt may give your credit score a boost or it may lower it -- it depends on what you do with your old credit cards and something called your credit utilization ratio.

Your credit score, or FICO score, is what lenders use to help determine how responsible you are with your money and how risky it would be to lend to you; the higher your credit score number, the lower the risk of lending to you. While this number is determined by a number of variables, a few things are certain: The amount of money you owe in relation to your available credit matters -- this is called your credit utilization ratio. For example, let's say you have three credit cards, each with a $15,000 limit. You carry $5,000 on each card, for a total of $15,000 of debt and a $45,000 available credit limit. If you transfer your $15,000 debt onto a new credit card with a $20,000 limit and close your old credit cards, your credit score may actually drop. Why? Your credit utilization ratio has changed. While the amount you owe hasn't changed, your line of available credit has decreased, and that new ratio makes you appear more of a risk to lenders.

While you don't have much input into how big the offered credit line on your new card will be, you do have control over what happens to your old, now unused accounts. Keep those accounts open but unused and you won't negatively impact your available credit limit or, in turn, your credit utilization ratio.

Ultimately, though, if you crunch the numbers and find you won't be able to pay off the balance you transferred during the low or zero percent time frame on a new low-interest card, then a balance transfer may not be the right solution for your money-saving goals. Let's talk about some other options, next.

Balance transfers aren't the only available option for consolidating credit card debt. For some, consolidating credit card debt into a debt consolidation loan or rolling credit card debt into another loan, such as a home equity loan, home equity line of credit (HELOC), or an unsecured line of credit (ULOC) may be more sensible -- or more feasible, as the best balance transfer offers are usually reserved for people with very good credit scores.

Balance transfers move your debt from credit card to credit card, but in the end it's still credit card debt, and credit card debt is considered unsecured debt. Unsecured debt means that there is nothing held as collateral. Secured debt, on the other hand, basically means that you borrowed money against something. Your mortgage, for example, is secured debt; if you default on your mortgage payments the bank can place a lien against or foreclose on your house. There are pluses and minuses to rolling credit card debt into a secured loan. For example, while you may be able to claim the interest on your home equity loan as a tax deduction, which is a plus, if you have trouble paying the loan, you risk losing your home, which falls squarely in the minuses.

Debt consolidation loans may be a good solution for those looking to consolidate all of their unsecured debt, including credit card debt and store card debt, into one secured loan. Debt consolidation loans usually offer a lower, more manageable monthly payment schedule but they come with a price, literally -- that lower monthly payment is usually a result of a longer payment period, which may mean you'll end up paying more overall.

In the end, no solution is perfect -- within two years of opening a loan as the solution to paying credit card debt, 70 percent of us will find ourselves with the same or more debt [source: McCune]. Alternatively, and if it fits your budget, instead of consolidating credit card debt focus on your payments: Make every payment on time, pay more than the minimum payment if possible, and pay down the card with the highest interest rate first to make the biggest impact.