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A Complete Guide to Debt Consolidation

By Rebecca Lake
September 25, 2019

Getting into debt can happen gradually. Perhaps you open a credit card account or two, and take out a personal loan. Throw in your student loans and a car payment and before you know it, you’ve got more debt obligations than you can manage. 

It’s easy to get overwhelmed but there is a possible solution: debt consolidation

What Is Debt Consolidation?

In a nutshell, consolidating debt means taking multiple debts and combining them into a single loan or line of credit. This can help make your debt load more manageable so that you can work on paying down what you owe

When debts are consolidated, you have one single payment to make towards the balance each month. You pay one interest rate, which can be fixed or variable depending on how your debts are combined. 

Assuming you’re not adding to your debt, consolidating is a strategy that can help you get ahead financially.

What Are the Benefits of Consolidating Your Loans?

Debt consolidation can offer several advantages. If you want to know whether debt consolidation is a good idea for you, take a look at these pros: 

  • You may end up with a lower interest rate. 
  • You may save money. When you have a lower interest rate, you’ll pay less in interest, saving money in the process.
  • You’ll have a single payment. Keeping up with one loan payment each month is easier than trying to juggle multiple payments. 
  • Your payment may be lower. Consolidating your debt can help you get a lower combined payment.

There’s also a credit score component involved with debt consolidation. If you’re merging your debts together by opening a new credit card or taking out a loan, you may see a slight dip in your credit score initially. 

Over time, however, you could see your score rise if consolidating allows you to pay down your debt faster. Having just one payment could also give your score a boost if you’re consistently making that payment on time every month. 

What Kinds of Debt Can You Consolidate? 

You may have more than one kind of debt and be wondering which ones you can consolidate. The good news is: consolidation can cover many different types of debt. It’s helpful to know which types of loans can be combined as you plan your payoff strategy. Take a look:


  • Student Loan Debt


If you took out multiple student loans to pay for your education, then consolidating can be a good way to get a handle on your payments. 

For example, you might owe multiple loan servicers with payments spread out throughout the month. Consolidating can whittle that down to just one loan servicer. This is a good thing because different loan servicers may have different rules when it comes to repayment. One servicer, for example, may offer an interest rate reduction when you autopay while another doesn’t. So, look for a lender that allows you to consolidate your loans with the best terms overall. 


  • Medical Debt


Getting sick or hurt can be a pain in the wallet if your health insurance requires you to pay a lot out of pocket or you don’t have coverage at all. Unpaid medical bills can turn into a bigger financial headache if your healthcare provider turns your account over to collections. 

Yet, it’s possible to consolidate medical bills into a single loan, which can ease some of the stress you might feel. This can be particularly helpful if you have a large medical debt related to an unexpected illness or injury that your insurance and/or emergency savings doesn’t cover. 


  • Credit Card Loans


Credit cards are convenient for spending money. Some even save you money if you can earn cash back, points or miles on purchases. 

The downside of credit cards is that they can come with high interest rates. If you’re only paying the minimum amount due each month, a higher rate can make it that much harder to chip away at what you owe. 

With credit consolidation, however, you can turn multiple card payments into one. Even better, you can get a lower rate on your balance. For example, you might qualify for a credit card that offers an introductory 0% APR for 12 to 18 months. That’s an opportunity to pay your credit card balance down aggressively to avoid interest charges and get out of debt faster. 


  • Additional Eligible Debt to Consolidate


Aside from credit cards, student loans and medical bills, there are a few other types of debt you can consolidate. Those include:

What Are Some Ways to Consolidate My Debt? 

The great thing about debt consolidation is that you have more than one way to do it. Transferring a balance to a credit card with a 0% APR is one possibility that’s already been mentioned. You can also combine balances using a debt consolidation loan

Both have their pros and cons and one isn’t necessarily better than the other. What matters most is choosing the option that’s right for you and your budget. As you’re comparing consolidation methods, it also helps to know how they work and what the benefits are, especially when it comes to your credit score. Read on to learn more about balance transfers, debt consolidation loans and other types of debt management programs.


  • Balance Transfer

Transferring a balance means moving the balance you owe on one credit card to another credit card. Ideally, you’re shifting the balance to a card with a low or 0% APR.

A balance transfer can be a good way to manage debt consolidation if your credit score allows you to qualify for the best transfer promotions. Plus, if you get a 0% rate for several months, this may give you enough time to pay off your debt in full without interest. 

When comparing balance transfer credit card promotions, it’s helpful to check your credit score so you know which cards you’re most likely to qualify for. Then, check the terms of the promotional offer so you know what the APR is and how long you can enjoy an interest-free period. 

Also, factor in any balance transfer fee the card charges. It’s not uncommon to pay 2%-3% of the balance you’re transferring to the credit card company as a fee. 

In terms of credit score impact, opening a new credit card can ding your score slightly. But you can get some of those points back over time by paying down the transferred balance. The key is not to add any new credit cards to the mix while you’re paying down the transferred balance.


  • Personal Loans

A personal loan is a loan that can meet different financial needs, including consolidating debt. Personal loans are offered by banks, credit unions and online lenders.

Every personal loan lender differs in how much they allow you to borrow and the rates and fees they charge. The rate terms you qualify for will hinge largely on your credit score and income. 

Some personal loans are unsecured. This means you don’t need to give the lender any collateral to qualify. A secured personal loan, on the other hand, requires you to offer some kind of security – such as a car title or money in your savings account – in exchange for a loan. You’d get your collateral back once the loan is paid off. 

A personal loan will show up on your credit score. The credit score impact is a little different than a balance transfer, however. Credit cards are revolving credit, which means your score can change based on how much of your available credit you’re using. 

Personal loans are installment loans. The balance on your loan can only go down over time as you pay it off. Making regular payments and making them on time can help improve your credit score after consolidating debt. 


  • Debt Management Programs

Debt management plans or debt management programs are not loans. These programs help you to consolidate and pay down your debt by working with your creditors on your behalf. 

A debt management plan works like this:

  • You give the debt management company information about your creditors, including the amounts owed and minimum monthly payment.
  • The debt management company negotiates new payment terms with your creditors.
  • You make one single payment to the debt management company each month.
  • The debt management company then divvies up that payment to pay each of your creditors. 
  • The process is repeated each month until your debts are paid off. 

A debt management program can be a good choice if you don’t want to take a loan or transfer a credit card balance. Your debt management company can help you combine multiple payments into one. They may even be able to negotiate a lower interest rate or the waiver of certain fees. 

The downside is that debt consolidation services may only apply to credit card debts. So, if you have student loans or other debts to consolidate, you may not be able to enroll them in the plan. 

Something else to watch out for is any fees the debt management company charges for their services. And of course, you’ll want to work with an accredited company. You can reach out to your local nonprofit credit counseling agency to get recommendations on reputable debt management programs. 

Who Should Avoid Debt Consolidation?

Debt consolidation may not be the best way to handle debt in every situation. Here are some scenarios where you might want or need to consider a different debt repayment option:

  • You don’t have enough income to make the monthly minimum payment required for a debt management program.
  • Your credit score isn’t good enough to qualify for a low-rate credit card balance transfer or personal loan. 
  • You’re worried that applying for a new loan or credit card could knock more points off your score. 
  • Consolidating debt would mean paying fees or upfront costs that would only add to what you owe. 
  • You’re not able to consolidate all the debt you have in one place. 
  • Your debt load is too high, and filing bankruptcy may make more sense. 
  • You have the income to pay down debt but you just need a plan. 

It’s important to do your research thoroughly to understand what debt consolidation can and can’t do for you. For example, consolidating debt through a debt management program may not be necessary if you just need help creating a payoff plan. That’s something a nonprofit credit counseling agency can help you with for free. 

Keep in mind that if you’re consolidating debt, you should also make sure you don’t add new debt to the pile. Cutting up your credit cards may be a little extreme but you can put them away and resolve not to use them until your debt is paid off. From there, you can work on creating new credit habits and using your cards responsibly. For example, only charge what you can afford to pay off in full each month. 

Remember the End Goal: Freedom From Debt

Paying off debt can take time and it’s important to stay committed and consistent. Persistence can go a long way in helping you achieve financial independence. While you’re working on your debt payoff, remember to look at your bigger financial picture. This includes budgeting wisely and growing your savings.

Chime has tools that can help you with both. You can use Chime mobile banking to stay on top of your spending and stick close to your budget. Setting up direct deposit from your paycheck into your savings or establishing an automatic transfer from checking to savings each payday can put you on the path to growing wealth. 

And remember: The more well-rounded you can make your financial plan, the better off you’ll be over the long term! 


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