Debt consolidation is the process in which you take multiple debts — think credit cards, personal loans or other unsecured debts — and combine them into a single payment. This makes the debt easier to pay off.
It's an especially good idea if you’re struggling with high-interest debt, like credit cards, since consolidation often helps you save money on interest.
If you want to simplify your debt repayment and potentially get out of debt faster, debt consolidation is a sound approach you can tackle on your own.
Here are the two main ways to consolidate your debt
Both of these options roll multiple debts into one, ideally with less interest than you’re paying now. The best choice depends on your credit score and the type of debt you have.
1. Get a 0% interest balance transfer credit card
If you want to pay off credit card debt and you have a good credit score (any score in the mid-600s or higher), you could apply for a 0% balance transfer credit card.
With this card, you move all your existing credit card balances onto it, then pay off the new balance with no interest during the promotional period. This period can last 15 to 21 months, depending on the card you choose. After that, your APR rises to the ongoing rate, and you will be charged interest on your balance going forward.
The new card allows you to more effectively pay down the core debt because you’re not wasting any money on interest. You can even apply the savings in interest back to the core debt, which will shorten the payoff period further.
2. Take out a fixed-rate debt consolidation loan
If you have multiple types of debt (so not just credit cards), or if you have less than stellar credit, you could apply for a debt consolidation loan.
With a debt consolidation loan, you use the money from the loan to pay off all your debts in one fell swoop. You then pay back the loan in monthly installments over a set term, usually one to seven years.
Debt consolidation loans come with fixed interest, so you’ll pay the same amount each month. This makes debt repayment easier to budget for.
Though you can get a debt consolidation loan with bad credit (a score in the high 500s or lower), you may not qualify for a lower rate than your current debts. In that case, it’s probably not worth taking out a loan.
Compare balance transfer cards and debt consolidation loans
| Balance transfer card | Debt consolidation loan | |
|---|---|---|
| Best for: | Credit card debt only. | Any unsecured debt, 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 7% to 36%. |
| How to qualify: | You’ll need good or excellent credit to qualify. | Borrowers with good or bad credit 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 one to seven years. |
🤓 Nerdy Tip
There are other ways to consolidate credit card debt, like taking out a home equity loan or borrowing from your retirement savings with a 401(k) loan. But these options involve more risk — to your home or to your retirement — so it’s best to go with one of the options above. When to consider debt consolidation
Consolidation works best when all of the following are true:
- Your total monthly debt payments are no more than 50% of your gross monthly income.
- You can qualify for a 0% balance transfer card or a consolidation loan that has a lower interest rate than your current debts.
- You can commit to consistent monthly payments until the debt is gone.
- If you choose a balance transfer card, you can pay off the balance before the 0% promotional period ends.
- If you choose a debt consolidation loan, you can pay it off within one to seven years.
Benefits of debt consolidation
You’ll save time and money: If you combine your debts under a lower interest rate, less of your money goes toward interest. That means you’re actually tackling the principal debt. This helps you get out of debt faster, especially if you apply any savings in interest back to the root debt.
You’ll no longer have a bunch of individual debts: If you’re overwhelmed by different due dates, interest rates and minimum payments, consolidation solves that problem. Whether you choose a balance transfer card or a consolidation loan, you have only one debt to manage.
You’ll have a clear finish line: Consolidation reveals a light at the end of the tunnel. If you take out a debt consolidation loan with a three-year term, you know you’ll be debt-free in three years. Compare that with making minimum payments on credit cards, which could mean months or years before they’re paid off.
Risks of debt consolidation
You’ll need to keep up with payments: Consolidating debt doesn’t make it go away — it just moves it somewhere else. You'll still need to make regular payments on your debt to pay it off on time and avoid late fees.
You could go further into debt: Consolidation frees up your credit cards, so it may be tempting to run up new balances. This will only increase your debt and leave you worse off than before. You’ll have to be diligent about not overspending and keeping debt manageable.
Debt consolidation calculator
Here’s an example of when consolidation makes sense.
Say you have two or three credit cards with interest rates ranging from 20% to 22%, and your credit is good. You might qualify for an unsecured debt consolidation loan at 18%. With less interest accruing each month, you'll make quicker progress toward being debt-free.
Use the calculator below to plug in your debts and what savings you may qualify for.
Does debt consolidation affect your credit?
Debt consolidation can affect your credit score in a few ways.
When you apply for a balance transfer card or a consolidation loan, you'll undergo a hard credit pull. This knocks a few points off your credit score and is normal.
Missing payments, like on a debt consolidation loan, could hurt your score. The same is true of running up your credit card balances again or closing your credit cards.
But if you avoid these behaviors and pay off your debt in full, consolidation should help your credit.
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 may lend to borrowers with lower credit scores.
» COMPARE: Best debt consolidation loans for bad credit
You can also explore other debt payoff methods that don't rely on credit. This includes credit counseling or strategies like the debt snowball or avalanche methods. Keep reading to learn more about these options.
When debt consolidation isn't worth it
Consolidation isn’t the only way to get out of debt. If you can’t qualify for a low enough interest rate, there are other smart payoff strategies.
Use the debt snowball or debt avalanche method
If your debt feels manageable, and you’d save only a small amount by consolidating, don’t bother. You can likely pay it off yourself with the debt snowball or debt avalanche methods.
The debt snowball method is when you pay off your smallest debt first, then your second-smallest and so on. This builds momentum through quick wins at the outset.
The debt avalanche method is when you pay off your highest-interest debt first, then your second-highest and so on. You then apply the savings in interest to each consecutive debt. This builds momentum as the savings increases.
Enroll in a debt management plan
If you’d like help tackling your debt, nonprofit credit counseling agencies offer debt management plans for a small fee. A credit counselor will work with your creditors to lower interest costs, then combine your debts into one payment, similar to consolidation. You then pay off the debt over three to five years.
Debt management plans are available no matter your credit score.
Consider debt settlement last
If those options don't work, you may consider settlement, which is when you settle the debt for less than you owe. This is risky, though, because it damages your credit score and rates of successfully settling are low.
You can first try to settle the debts on your own by calling your creditors and negotiating down the debt. But many people choose to hire a third-party debt settlement company, which negotiates on your behalf. You'll need to pay a settlement fee to the company if the negotiation is successful.
» MORE: How does debt settlement work?
