What Is Debt Consolidation, and Should I Consolidate? - NerdWallet (2024)

MORE LIKE THISMaking MoneyPaying Off DebtPaying Your BillsPersonal Finance

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 for you 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 reorganize multiple bills with different interest rates, payments and due dates, debt consolidation is a sound approach you can tackle on your own.

Want expert help? Ask a Nerd directly

Simply send us your questions, and our dedicated in-house Nerds will provide you with thoughtful responses within 2 business days.

What Is Debt Consolidation, and Should I Consolidate? - NerdWallet (1)

How to consolidate your 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 profile, as well as your debt-to-income ratio.

  • Get a 0% interest, balance-transfer credit card: Transfer debt onto this card and then be sure to pay it off during the promotional period to get the interest-rate break. You will likely need good or excellent credit (690 or higher) to qualify.

  • Get a fixed-rate debt consolidation loan: Use the money from the loan to pay off your debt, then pay back the loan in installments over a set term. You can qualify for a loan if you have bad or fair credit (689 or below), but borrowers with higher scores will likely qualify for the lowest interest rates.

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 risk — to your home or your retirement.

» MORE: 5 ways to consolidate debt

Debt consolidation calculator

Use the calculator below to see whether or not it makes sense for you to consolidate.

When debt consolidation is a smart move

Success with a consolidation strategy requires the following:

  • Your monthly debt payments (including your rent or mortgage) don’t exceed 50% of your monthly gross income.

  • Your credit is good enough to qualify for a credit card with a 0% interest period or low-interest debt consolidation loan.

  • Your cash flow consistently covers payments toward your debt.

  • If you choose a consolidation loan, you can pay it off within five years.

Here’s an example when consolidation makes sense: Say you have two or three credit cards with interest rates ranging from 11.21% to 25.7%, and your credit is good. You might qualify for an unsecured debt consolidation loan at 7.99% — 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.

Still have questions? Ask a Nerd directly

Simply send us your questions, and our dedicated in-house Nerds will provide you with thoughtful responses within 2 business days.

Ask a Nerd

What Is Debt Consolidation, and Should I Consolidate? - NerdWallet (2)

Is it a good idea to consolidate credit cards?

Consolidate your debt if you can get a better interest rate and/or it will help you make payments on time. Just make sure this consolidation is part of a larger plan to get out of debt and you don’t run up new balances on the cards you’ve consolidated. Read about how to tackle credit card debt.

How does a debt consolidation loan work?

A personal loan allows you to pay off your creditors yourself, or you can use a lender that sends money straight to your creditors. Read about the steps required to get a personal loan.

Do debt consolidation loans hurt 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. Learn more about how debt consolidation affects your credit score.

When debt consolidation isn't worth it

Consolidation isn’t a cure-all for all of your debt problems. You will 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. You can use a credit card payoff calculator to test out the different strategies.

  • 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.

» LEARN: What Canadians should consider about debt consolidation

What Is Debt Consolidation, and Should I Consolidate? - NerdWallet (2024)


What Is Debt Consolidation, and Should I Consolidate? - NerdWallet? ›

Debt consolidation rolls your existing debts into one, ideally with a lower interest rate and shorter payoff time, saving you money and time until you're debt-free. This is often accomplished with a debt consolidation loan, but there are other ways to consolidate debt depending on your specific situation.

Is debt consolidation program a good idea? ›

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

What is one bad thing about consolidation? ›

1. May Come With Added Costs. Taking out a debt consolidation loan may involve additional fees like origination fees, balance transfer fees, closing costs and annual fees. When shopping for a lender, make sure you understand the true cost of each debt consolidation loan before signing on the dotted line.

What is a disadvantage of a debt consolidation? ›

You may pay a higher rate

Your debt consolidation loan could come with more interest than you currently pay on your debts. This can happen for several reasons, including your current credit score. If it's on the lower end, lenders see you as a higher risk for default.

What is the meaning of debt consolidation? ›

Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful.

Does consolidation hurt your credit? ›

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

Is debt consolidation good or bad for your credit? ›

Debt consolidation loans can hurt your credit, but it's only temporary. The lender will perform a credit check when you apply for a debt consolidation loan. This will result in a hard inquiry, which could lower your credit score by 10 points. Hard inquiries will only affect your credit score for one year.

Why shouldn't you consolidate your debt? ›

You might lose borrower benefits such as interest rate discounts, principal rebates, or some loan cancellation benefits associated with your current loans. Normally, consolidating your current loans could cause you to lose credit for payments made toward IDR plan forgiveness or PSLF.

What should be avoided in consolidation? ›

5 Costly Debt Consolidation Mistakes – and How to Avoid Them
  • Locking in the first interest rate you're offered.
  • Choosing the lowest monthly payment.
  • Borrowing more money than you need.
  • Only considering a personal loan.
  • Getting caught in a cycle of debt.
Jul 17, 2023

What is the risk of debt consolidation? ›

Risks of Debt Consolidation

For example, if you take out a new loan with lower monthly payments but a longer repayment term, you may end up paying more in total interest over time. You can also hire a debt consolidation company to assist you. However, they often charge hefty initial and monthly fees.

What are 4 things debt consolidation can do? ›

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.

How long does debt consolidation stay on your record? ›

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

Is debt consolidation a good reason to get a loan? ›

Having all your debt in one place can make it easier to see how much you owe, how quickly you're paying it off, and how much interest you're being charged. Potentially lower rates. You may be able to reduce the amount of interest you're paying by consolidating your debt under one lower interest loan.

Does debt consolidation go to your bank account? ›

Unlike a balance transfer, where you move debt from one account to another, when you get a consolidation loan, the cash is deposited directly into your bank account that you can use to pay off all of your credit card debt at once.

Do I need collateral for debt consolidation? ›

People often use unsecured personal loans, which means no collateral is needed, to consolidate credit card debt. They can also use debt consolidation to combine and pay off other types of debt, such as auto loans and other personal loans.

How long does a debt consolidation stay on your credit? ›

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

Top Articles
Latest Posts
Article information

Author: Otha Schamberger

Last Updated:

Views: 5695

Rating: 4.4 / 5 (75 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Otha Schamberger

Birthday: 1999-08-15

Address: Suite 490 606 Hammes Ferry, Carterhaven, IL 62290

Phone: +8557035444877

Job: Forward IT Agent

Hobby: Fishing, Flying, Jewelry making, Digital arts, Sand art, Parkour, tabletop games

Introduction: My name is Otha Schamberger, I am a vast, good, healthy, cheerful, energetic, gorgeous, magnificent person who loves writing and wants to share my knowledge and understanding with you.