Debt Consolidation: Combine Your Debts Into One Simpler Payment
Debt consolidation means replacing several debts with one. Instead of juggling five credit card payments with five due dates and five interest rates, you make one payment to one lender. Done well, consolidation lowers your interest cost, shortens the time it takes to become debt-free and makes your finances easier to manage.
Unlike debt settlement, consolidation does not reduce the amount you owe. You still repay the full balance, just on better terms.
Key takeaways
- Debt consolidation rolls several debts into a single new payment, ideally with a lower interest rate.
- The main options are a personal loan, a 0% balance transfer card, a debt management plan or a home equity loan.
- Consolidation only saves money if the new rate and fees are lower than what you pay today, and if you avoid running up new balances.
The four main ways to consolidate debt
1. Debt consolidation loan
A fixed-rate personal loan from a bank, credit union or online lender pays off your existing debts, and you repay the loan in fixed monthly installments, usually over two to seven years.
Best for
People with fair to good credit and steady income.
Watch for
Origination fees (often 1% to 10% of the loan), and rates that are no lower than what you pay now.
2. Balance transfer credit card
You move high-interest credit card balances to a new card with a 0% introductory rate, typically for 12 to 21 months.
Best for
People with good credit who can pay the balance off before the promotional period ends.
Watch for
Transfer fees of around 3% to 5%, and a high regular rate once the promotion expires.
3. Debt management plan (DMP)
A nonprofit credit counseling agency negotiates lower interest rates with your creditors. You make one monthly payment to the agency, which pays your creditors. Plans usually last three to five years.
Best for
People who don’t qualify for a good loan but can afford a steady monthly payment.
Watch for
Small monthly fees, and the requirement to close the enrolled credit card accounts. Choose an agency accredited by the NFCC or FCAA.
4. Home equity loan or line of credit
You borrow against the equity in your home, usually at a lower rate than unsecured debt.
Best for
Homeowners with substantial equity and very stable income.
Watch for
This turns unsecured debt into debt secured by your home. If you can’t make the payments, you could lose your house. Use it with great caution.
When debt consolidation makes sense
- The new interest rate, including fees, is clearly lower than your current average rate.
- You can afford the new monthly payment comfortably.
- Your spending is under control, so the paid-off cards won't fill up again.
- You are current or only slightly behind on your payments.
When it doesn't
- If you are far behind and can't afford the payments on your current debts, a new loan may only delay the problem. Debt settlement or bankruptcy may be more realistic.
- If the only loans you qualify for have rates as high as your cards, there is nothing to gain.
- If the underlying cause of the debt hasn't changed, consolidation can lead to twice the debt.
How consolidation affects your credit
Applying for a loan or card triggers a hard inquiry, which can dip your score by a few points. Over time, consolidation often helps your score, because paying down credit cards lowers your credit utilization and one on-time payment is easier to manage than many.
Not sure consolidation will work for you?
A debt remediation specialist can review your debts and help you choose between consolidation, settlement and other options.
Frequently asked questions
Does debt consolidation hurt your credit?
There may be a small, temporary dip from the credit inquiry and the new account. Most people see their score improve over time as balances fall and payments stay on time.
Can I consolidate debt with bad credit?
It is harder, and loan rates may be too high to help. A nonprofit debt management plan does not depend on your credit score and can be a better option.
What debts can be consolidated?
Mainly unsecured debts: credit cards, store cards, medical bills, personal loans and some payday loans. Federal student loans have their own consolidation program through the Department of Education.
