What Is the Best Way to Consolidate Debt?


If your debt has gotten out of hand and you’re struggling to pay down high-interest credit card debt, you might consider debt consolidation. Debt consolidation rolls multiple debts into one single monthly payment.

debt consolidation

Debt consolidation will streamline your monthly payments and help you get out of debt faster. Whether you’re struggling to make ends meet or just want to use your money more wisely, debt consolidation may be a good option for you.

What is debt consolidation and how does it work?

Debt consolidation works by taking multiple monthly debt payments and rolling them into one single payment. By doing this, you’ll simplify your monthly payment and possibly save money with a lower interest rate.

Your payments will become more manageable so you can pay off your debt faster. There are a few different ways you can accomplish this.

Debt Consolidation Loan

A debt consolidation loan is a personal loan that you use to pay off your existing unsecured debt. Once your debt is paid off, you’ll repay your personal loan over time. And most debt consolidation loans are unsecured, so you won’t have to put down any type of collateral.

0% Balance Transfer Credit Card

Many companies offer 0% introductory APRs for transferring your existing balance to a new card. Once you transfer your existing debt onto the transfer card, you can pay it in full within the introductory period.


If you’re a homeowner, you can borrow against the equity in your home and consolidate your debt with a Home Equity Line of Credit (HELOC) or home equity loan. HELOCs tend to come with lower interest rates than personal loans. However, home equity loans can be risky because you put your home in jeopardy if you’re unable to make the monthly repayments.

401(k) Loan

With a 401(k) loan, you can borrow against your retirement savings to consolidate your debt. The interest rate will be lower than a credit card, and these loans won’t affect your credit.

However, a 401(k) loan should be used as a last resort. These loans often come with hefty tax penalties, and you risk derailing your retirement plans.

Are debt consolidation and debt management the same thing?

No, there is a big difference between debt consolidation and debt management. Debt management is also referred to as debt settlement, and with this strategy, you’ll keep your accounts separate.

A debt relief company will negotiate on your behalf to reduce your monthly payments and interest where they can. You won’t open any new loans or accounts, but the monthly payments are reduced wherever possible.

Debt management could be a wise choice for individuals that have bad credit and can’t qualify for a low-interest personal loan or credit card.

When is debt consolidation a good idea?

Depending on your circumstances, debt consolidation may or may not be right for you. Here are a few scenarios when you might consider debt consolidation:

  • Your outstanding debt (excluding your mortgage) is less than 40% of your monthly income.
  • You have a high credit score and can qualify for good rates on a balance transfer card or debt consolidation loan.
  • Your income is high enough to meet your monthly debt repayments.
  • You have a strategy for staying out of debt in the future.

Here is an example of when debt consolidation is a good plan. Let’s say you have three open credit cards with interest rates ranging between 19% and 25%.

If you’re able to qualify for an unsecured personal loan with an 8% interest rate, then debt consolidation could be a good plan. You’re saving money on interest and can get out of debt quicker than if you continue paying on high-interest credit cards.

When is debt consolidation a bad idea?

The biggest problem with debt consolidation is that it doesn’t address the reasons why you got into debt in the first place. If you don’t change your spending habits, then consolidating debt is only going to be a short-term fix.

Debt consolidation is also may not be for you if your credit score is low and you’re unable to qualify for a lower interest rate. Simplifying your monthly payments is helpful, but only if you can eliminate the amount you’re paying in interest.

And finally, you should only use a balance transfer credit card if you have a plan to pay it off during the introductory period. If not, you could end up in the same financial situation you’re already in.

Can debt consolidation hurt your credit score?

To understand how debt consolidation might affect your credit, let’s look at the factors that determine your score. 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%

Your payment history and the amount you currently owe make up the majority of your FICO score. So if you’ve maxed out your credit cards or are having trouble making your payments on time, then your score has likely already been affected.

That being said, there are a few things you should watch out for when you’re considering debt consolidation.

Hard Inquiries

A hard credit inquiry happens when you’ve been pre-approved for a loan and are moving forward with the application process. A hard credit inquiry won’t hurt your credit long-term, but you should expect to see a temporary dip after you’ve applied for a new loan.

Credit Utilization

Credit utilization refers to how much debt you have as opposed to how much credit you have available. When you’re consolidating your debt, your credit utilization ratio may temporarily go up. However, if you keep your current credit cards open and don’t close the accounts, your credit utilization should eventually go back down.

How to Prepare for Debt Consolidation

If you decide to move forward with debt consolidation, there are a few things you should do to prepare. First, you should make a list of all your monthly debts. This list should include everything you owe, excluding your mortgage payments.

Next, you should track down your recent billing statements and add up your total balances. Add up all your current balances to figure out how much money you need to consolidate everything.

Now that you know how much you owe, you should check your credit report. This will give you a better idea of what kind of rates you can qualify for. If your score is low, you should take steps to improve it before applying for new credit.

And finally, you should shop around for the right lender. Look for lenders that work with borrowers in your situation. Compare the interest rates, loan terms, fees, and any other requirements needed to submit an application.

Bottom Line

Debt consolidation isn’t a quick fix, and it won’t solve all your financial problems. It can be a good option, but you need to address the reasons why you got into so much debt in the first place.

Do-it-yourself repayment options, like the debt snowball method, could be a good alternative to debt consolidation.

If you’ve decided to pursue debt consolidation, review your loan options, and see what you qualify for. If you can qualify for a 0% balance transfer card or low-interest personal loan, then debt consolidation may be a good option for you.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about a variety of personal finance topics including student loans, credit cards, investing, building credit, and more.