What Is Debt Consolidation, and Should I Consolidate?
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Two ways to consolidate debt are with a balance transfer credit card or a debt consolidation loan.
Debt consolidation is a good idea if monthly debt payments don’t exceed 50% of your monthly gross income, and you have enough cash flow to cover debt payments.
Debt consolidation isn’t a quick fix for severe debt problems.
Debt consolidation rolls multiple debts, typically high-interest debt such as credit card bills, into a single payment. Debt consolidation might be a good idea if you can get a lower interest rate than you're currently paying. That will help you reduce your total debt and reorganize it so you can pay it off faster.
If you’re dealing with a manageable amount of debt and just want to simplify multiple bills with different interest rates, payments and due dates, debt consolidation is a sound approach you can tackle on your own.
How to consolidate debt
There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill. The best option for you will depend on your credit score and debt-to-income ratio.
Get a 0% interest, balance transfer credit card
With a 0% balance transfer credit card, you transfer your existing credit card balances onto the new card and then pay it off with zero interest during the promotional period, which can last 15 to 21 months. This saves money on interest and can even help you get out of debt faster, since you can apply that extra savings to paying down your debt. You’ll need good or excellent credit (690 credit score or higher) to qualify.
Get a fixed-rate debt consolidation loan
With a debt consolidation loan, you use the money from the loan to pay off your debts, then pay back the loan in installments over a set term, usually one to seven years. Because interest rates are fixed on a debt consolidation loan, you’ll pay the same amount each month until your loan is paid off. You can get a debt consolidation loan with bad credit (629 credit score or lower), but borrowers with higher scores will likely qualify for the lowest interest rates.
Compare balance transfer cards and debt consolidation loans
Balance transfer card | Debt consolidation loan | |
|---|---|---|
Best for: | Credit card debt only. | Any unsecured debts, including credit cards. |
How it works: | Transfer your credit card balances to the new card, then pay the card off before the promotional period ends. | Use the money from the loan to pay off your debts, then pay back the loan in fixed monthly installments. |
Cost: | No interest during the promotional period, but some cards charge a balance transfer fee (3% to 5% of the amount transferred). | Rates on debt consolidation loans range from 6% to 36%. |
How to qualify: | You’ll need good or excellent credit to qualify. | Borrowers across the credit spectrum can qualify. |
Timeline: | It’s best to pay off your debt during the card’s promotional period, typically lasting 15 to 21 months. | Debt consolidation loans have fixed terms, typically lasting one to seven years. |
Two additional ways to consolidate debt are taking out a home equity loan or borrowing from your retirement savings with a 401(k) loan. However, these two options involve more risk — to your home or to your retirement — so it’s best to consider alternatives first.
Debt consolidation calculator
Use the calculator below to see whether or not it makes sense for you to consolidate.
» MORE: 5 ways to consolidate debt
When debt consolidation is a smart move
Success with a consolidation strategy requires the following:
Your monthly debt payments don’t exceed 50% of your monthly gross income.
Your credit is good enough to qualify for either a 0% balance transfer card or a debt consolidation loan that has a lower interest rate than your existing debt.
Your cash flow can consistently cover regular payments toward your debt.
If you choose a balance transfer card, you can pay it off during the promotional period.
If you choose a consolidation loan, you can pay it off within one to seven years.
Here’s an example when consolidation makes sense: Say you have two or three credit cards with interest rates ranging from 22.63% to 27.7%, and your credit is good. You might qualify for an unsecured debt consolidation loan at 12.99% — a significantly lower interest rate. With less interest accruing each month, you'll make quicker progress toward being debt-free.
For many people, consolidation reveals a light at the end of the tunnel. If you take a loan with a three-year term, you know it will be paid off in three years — assuming you make your payments on time and manage your spending. Conversely, making minimum payments on credit cards could mean months or years before they’re paid off, all while accruing more interest than the initial principal.
Is it a good idea to consolidate credit cards?
Consolidating credit card debt is generally a good idea, since it makes it easier to pay off. If you qualify for a low interest rate on a debt consolidation loan, or you transfer your debts to a 0% balance transfer credit card, you’ll save money on interest, which you can then put toward paying down your debt.
Just make sure you don’t run up new balances on the cards you’ve consolidated, since that can leave you further in debt, and consider all the pros and cons of debt consolidation before applying for a loan or balance transfer card.
How does debt consolidation work?
Debt consolidation works by combining multiple debts into one, which you then pay off over time, ideally at a lower interest rate. The specifics of debt consolidation will vary based on the type of consolidation product you apply for.
For example, while a balance transfer card means moving your existing credit card balances onto a no-interest credit card, a consolidation loan gives you a lump sum, which you then use to pay off your various debts.
Does debt consolidation affect your credit?
Debt consolidation can help your credit if you make on-time payments or if consolidating shrinks your credit card balances. Your credit may be hurt if you run up credit card balances again, close most or all of your remaining cards, or miss a payment on your debt consolidation loan.
Can you consolidate debt if you have bad credit?
You can consolidate debt if you have bad credit, though your options may be more limited. Debt consolidation loans are available to borrowers with bad credit. Credit unions and online lenders are most likely to accept borrowers with lower credit scores.
» COMPARE: Best debt consolidation loans for bad credit
When debt consolidation isn't worth it
Consolidation isn’t a cure-all for all of your debt problems. You may still need to take steps such as seeking low-cost financial advice or lowering your living expenses. It’s also not the solution if you’re overwhelmed by debt and have no hope of paying it off even with reduced payments.
If your debt load is small — you can pay it off within six months to a year at your current pace — and you’d save only a negligible amount by consolidating, don’t bother. Instead, try a do-it-yourself debt payoff method instead, such as the debt snowball or debt avalanche.
If the total of your debts is more than half your income, and the calculator above reveals that debt consolidation is not your best option, you’re better off seeking debt relief than treading water.
