If you have accumulated a lot of debt and are making multiple payments each month on a number of credit cards or loans, you might consider consolidating. Debt consolidation should be considered whenever you feel overwhelmed with monthly payments because it can get you out of debt faster with less money spent.

debt consolidation

Whether you’re struggling to make ends meet or just want to use your money more wisely, debt consolidation may be for you.

What is debt consolidation?

Debt consolidation helps to eliminate multiple monthly payments to different creditors and replace it with a single payment.

There are several different ways to achieve this and the best options typically save you money by giving you a lower interest rate or negotiating a lower settlement payment.

It doesn’t mean the debt is gone, it simply changes your payment terms in some way to hopefully make your finances more manageable.

Most people turn to debt consolidation when they need to consolidate credit card debt. That’s because when you’re paying off huge credit card balances most of your payment is just being applied to interest.

Credit cards have much higher interest rates than even certain unsecured loans you can get from a bank, so consolidating your debt can potentially save you a lot of money by lowering and simplifying your monthly payment.

What is the best way to consolidate your debt?

Depending on how much debt you have, debt consolidation can be a great choice, provided you are careful about how you approach your options. It’s important to do your due diligence before you make a decision. The better informed you are about your options, the smarter your choices will be.

Debt Consolidation Loans

With a debt consolidation loan, you use the money from the loan to pay off all of your existing debt. Because it is a type of personal loan, a debt consolidation loan is paid off in installments over a set period of time. The length of the payoff term determines how much you’ll pay each month and how much interest you’ll pay during the life of the loan.

Shorter loan terms mean higher payments, but less interest paid overall (and depending on the loan amount, the difference could be thousands of dollars). With a longer loan term, your monthly payments are lower and more manageable, but you’ll make payments for longer and will pay more interest over the long run.

In addition to taking out a loan with a debt consolidation company, there are also a great variety of online lenders who make personal loans to people with all types of financial backgrounds. While you might think of personal loans being used for things like pools, weddings, and vacations, debt consolidation is actually one of the most common uses for this type of loan.

Shop around for the best online personal loans to see what kind of rates you can qualify for. Most lenders provide pre-approvals that won’t affect your credit score so you can check your eligibility no matter what your credit situation is.

Best Debt Consolidation Loans for 2019

Low-Interest or 0% Balance Transfer Credit Cards

It may seem odd to fight debt with another credit card, but it can work in some instances. Many credit card companies offer low introductory APRs for transferring existing balances to the new card; in fact, some even offer a 0% APR for a limited time. Like any other deal that seems too good to be true, there are a few catches to be aware of.

The first is that you’ll likely need pretty solid credit to qualify for one of these credit card offers. The second is that once the introductory period ends, you’ll be back up to high interest rates — maybe even higher than your original cards.

So if you don’t expect to pay off all your debt during that low-rate period, it might not be worth the effort. It’s just a matter of looking at the numbers to see what makes the most sense for your personal situation.

With these credit cards, you can transfer all of your debts regardless of what type they are onto the new card, including loans. The trick is to pay it all off within the 0% promotional period.

This way all of your payments go directly towards the principal and none of them are wasted on interest. When every single penny you pay goes towards principal, climbing out of debt is a lot easier and faster.


Secured loans for debt consolidation such as second mortgages or a Home Equity Line of Credit (HELOC) have even lower interest rates than personal loans. However, there does come the risk of putting up your home as collateral. But if you have equity in your home, you can access some of that cash through a HELOC.

There are generally two recommended ways to consolidate your debt. The first involves taking out a personal loan, and the other taking a unique type of credit card. Depending on your debt and credit score, one option might be better than the other.

Do consolidation loans hurt your credit score?

To better understand how moving forward with debt consolidation will likely affect your credit score, let’s do a quick recap.

Your FICO credit score is determined by the following five factors:

  • Payment History: 35%
  • Amount Owed: 30%
  • Length of Credit History: 15%
  • New Credit: 10%
  • Types of Credit Used: 10%

Borrowers struggling with high debt usually also have lower credit scores because of how much they owe. As you can see, the amount owed is the second highest contributor to your credit score at 30%. If all of your credit cards are maxed out, then your score is lower than it could be even if you have been making all of your payments on time.

If you’ve been struggling to keep up with payments, then your payment history has likely also been dinged, too. Each time you don’t make a payment on time, regardless of the reason, your score takes a dip. The longer a bill goes unpaid (30 days, 60 days, 90+ days) the more severe the dip will be.

If you have a lot of debt, you’re probably hoping that if you pay off everything in one big “on time” payment your score is going to jump up overnight.

Unfortunately, it’s not that simple. There are two reasons for this.

Reason 1: Hard Inquiries

In the interest of complete transparency, a hard credit inquiry will only drop your score by about five points. Hard credit inquiries happen after you have been pre-approved and officially move forward with applying for a new line of credit.

In the grand scheme of things, it’s not going to cripple your future borrowing goals or purchase ambitions, but expect the slightest of dips after you’ve applied for debt consolidation with a reputable lender. If you’re shopping around for rates and deals, do it within a few weeks and it will only count as one inquiry.

Reason 2: Credit Utilization

Credit utilization, or amount owed, refers to how much debt you have as opposed to how much credit you have available. When consolidating debt, your amounts owed credit category will go back and forth.

The reason is that credit cards are considered maxed out whenever the balance surpasses 70%. Divide how much you owe by the credit card’s balance to get the card’s percentage balance. Say you take out a credit card to transfer your debt to — that one card will likely be pushed past 70%, which would cause your score to dip.

The good news, though, is that if you keep your other cards open and don’t close the account, you’ll have a lower utilization ratio. Will the cards with paid balances offset the card with a close to maxed out balance? Not really. Your score will essentially stay the same (in the beginning, but more on that below).

If you take out a loan to pay off debt, it’s more or less the same story. While you’re paying off debt you’re also incurring debt.

In the beginning, your score will stay the same, and may possibly even take a dip.

What can you do to keep your score from dipping after consolidating?

Credit isn’t fixed overnight, so make the most of consolidating your debt by following these simple rules.

Keep all of your cards open.

One reason for this is because of utilization, and the other is because the length of credit history category. The longer a credit card is open, the more it helps your credit score.

Keep a minimum balance on each credit card.

Cards with balances between 1% and 9% help your credit score more than cards with zero balances on them. It sounds counter-intuitive to not keep them at zero, but cards need to be in an active state if you want them to help your score.

Make every payment on time.

When you consolidate, you have fewer payments each month and a lower monthly payment to stay on top of, so there’s no reason to be late. While consolidating takes time to help your credit score, the most effective approach to improve your credit is to consistently make payments on time.

Can you get a debt consolidation loan with bad credit?

Yes, it is possible, but if you get approved, you’ll likely pay higher interest than people with good credit. Luckily, there are several lenders that offer personal loans for bad credit with decent interest rates. Shop around to find the best possible loan conditions for your credit profile.

When is debt consolidation a good idea?

There are a few factors to determine if you should consolidate your debt. The biggest factor is if your debt does not exceed 50% of your income. If it does, then you may want to consider other strategies. If you’re able to make payments and keep an acceptable standard of living, then consolidation could be a good option.

An important thing to keep in mind is that you still need to devote your cash flow to your debt. Debt consolidation doesn’t remove this factor. Though you could save money each month, if you want to get out of debt, a good portion of your paycheck still needs to go to paying off your debts.

You should also have decent credit if you want to find a good deal. This is unfortunate, yet true. The best consolidation loans or credit cards are only available to people with good credit. There are options for people with poor credit, but they may have higher interest rates.

Let’s look at a quick example.

If you have two credit cards with rates at about 19% and 25%, but you qualify to get a personal loan with an interest rate at 8%, then consolidating your debt is a smart move. You’ll save money and get out of debt faster.

When is debt consolidation a bad idea?

There are a few situations where consolidating debt is probably not a good option and could actually hurt you both in the short term and long term.

If you return to viewing and handling money the same way.

If you don’t change how you manage your monthly spending habits, consolidating your debt will only help you for a short while. Creditors know that when people pay off a credit card, psychologically they view it as acceptable to use them again because the balances are so low.

Even if they worked really hard to pay everything off, they’ll go back into debt in a relatively short amount of time. In many ways, truly getting out of debt is more of a mindshift than it is anything else. To be financially responsible, you must view money as something to protect rather than spend.

When the interest rate is greater than what you already have.

If you have poor credit, it’s possible a lending institution won’t give you a better rate than what you already have. In some cases, it can be more than what you have now. If this happens, don’t take the loan or credit card offer.

Yes, it’s nice to all of your debts centered in one place, but it’s not worth it if you’ll actually have to spend more to get out of debt in the long run. Of course your monthly obligations may be lowered by taking on a longer loan term, but in the end, you’re spending more money than you should, and that’s rarely a wise choice.

When you won’t be able to pay it all off during the introductory period.

If the rate is set to jump after a trial period, will you be able to have it all paid off before the rates jump up? If not, what will the rates jump up to? Take the time and do the math.

Calculate how much you’ll be able to pay off during the trial period, what your payments will look like once rates jump up, and what it will cost in the long-term to get it all paid off. If the numbers are greater than what they were before, it’s probably best to keep things status quo.

Debt consolidation programs you should avoid:

Some people turn to alternative ways to pay off debt. The most popular ones are getting a home equity loan or a 401(k) loan. However, these are not recommended.

A home equity loan involves taking out a loan that is secured by whatever equity you have in your home. The problem with doing this is that you are putting yourself at more risk. Here’s an abbreviated list of all the cons associated with a home equity loan:

  • You could lose your home
  • It might take ten years or more to pay off your debt
  • It can’t be discharged via a bankruptcy the same as credit card debt can
  • If the value of your home drops, it’s possible you could end up paying more than it’s worth

The problems with a 401(K) loan involve:

  • Losing a significant portion of your retirement savings
  • There could be tax consequences and penalties involved
  • It’s not as easy to discharge through a bankruptcy

Neither option is very appealing when you get down to it. Though both could get you out of debt as fast and efficiently as a personal loan or 0% credit card, the potential cons far outweigh the benefits.

How do you prepare for debt consolidation?

If you decide to move forward with a personal loan or credit card balance transfer, there are a few things you should do to prepare.

  1. First, make a list of all of your monthly debts. These should include all of your credit cards and loans.
  2. Find your most recent billing statements and make note of what the balance is for each.
  3. Add up all of your debts to figure out how much you need to consolidate everything.
  4. Determine what your credit score is. If it’s low, you may want to take steps to improve it before applying for a loan or credit card. Get a credit report from each of the credit bureaus (Experian, Equifax, and TransUnion), and make sure that the information on each report is accurate. For many Americans, there are negative entries on their report that are not true. If this is the case for you, you’ll need to begin the dispute process.
  5. Five, shop around for the best company working with borrowers with your credit profile. Compare interest rates, loan terms, fees, and any requirements needed to submit an application.

Is debt consolidation the same as debt management?

No, there is a difference. With debt management, also called debt settlement, you still keep all of your accounts separate. Debt relief companies negotiate on your behalf to reduce monthly payments and interest rates where they can. No new accounts are opened, but the monthly toll is reduced whenever and wherever possible. It may be a wise choice for people with bad credit who can’t qualify for a personal loan or credit card.

Bottom Line

Review your options and see what you qualify for. If your credit score can support a 0% balance transfer card or low-interest personal loan, then debt consolidation may be just the answer you’ve been looking for.