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. When you consolidate your debts, you make one single payment toward 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, debt consolidation can be a smart strategy to help you pay off your debt quicker and get ahead financially.
There are different ways to consolidate debt, and each method has its own risks to be aware of. Before moving forward with any debt consolidation plan, learn how each method works.
Get a balance transfer credit card
Best for: those with a good credit score (690 or higher) who can pay off the transferred debt in full before interest rates kick in
Balance transfer credit cards allow you to move the balance you owe on one credit card to another credit card. Ideally, you’ll shift the balance to a card with a 0% annual percentage rate (APR).
A balance transfer credit card can be a helpful debt consolidation method if your credit score allows you to qualify for the best transfer promotions. Many offer 0% APR for a set period, anywhere from 12 to 20 months. The best-case scenario is to pay off your transferred debt in full during the 0% APR period to avoid paying any interest.
When comparing balance transfer credit card promotions, check your credit score to know which cards you can qualify for. Then, review the terms of the promotional offer so you know what the APR is and how long you can enjoy an interest-free period. Be sure to also consider the following before opening a balance transfer credit card:
- Will the total amount of debt you transfer be lower than your current credit limit?
- Have you read the fine print, so you’re aware of any fees?
- Does the APR also apply to new purchases made on the card, or is it higher than the balance transfer APR? If it is, be prepared to pay more for any new purchases.
- Can you pay off the balance before the 0% APR period ends? If not, will the new APR following the promotional period be lower than the APRs of any other cards you’re currently paying?
Asking yourself these questions will help make sure you don’t end up paying more by opening a balance transfer credit card. If you’re confident you can pay off the balance in full during the promotional period, a balance transfer might be right for you.
| Pros | Cons |
| Can help you save money on interest | You may have to pay a balance transfer fee |
| Can allow you to switch to a card with more favorable terms | The low interest rate only lasts for a set time |
Get a debt consolidation loan
Best for: those with good or excellent credit scores
Debt consolidation loans can be used to pay off student loan debt, medical debt, and credit card debt. If you can get approved for one with a better interest rate than what you’re currently paying, you can reduce your debt by paying less interest.
If you’re paying 20% interest on your current debt but get approved for a debt consolidation loan with a 15% APR, you’ll save more money in the long run.
That said, you generally need a good credit score to qualify for the perks of this method. If your credit score is 600 or less, finding a lender willing to work with you is still possible, but you may have a harder time qualifying for the best rates.
Shop around and compare different loan offerings. Pay attention to the repayment terms, service fees, and general terms of service, so you know the stipulations up front.
| Pros | Cons |
| Fixed monthly payments | Requires a good credit score to secure the best rates |
| Lower interest rates | May require account fees |
| Reduced total amount of debt owed |
Sign up for a debt management plan
Best for: those seeking support with unsecured debt like credit cards and personal loans
Debt management plans (DMPs) help you pay down your debt by working with your creditors for you. Offered by nonprofit credit counseling firms, DMPs are meant for people dealing with unsecured debt like credit cards or personal loans — they don’t cover other types of debt like student loans, auto loans, or mortgages.
A debt management program can be helpful if you don’t want to take out a loan or transfer a credit card balance. Ideally, the debt management company you work with can negotiate a lower interest rate or waive certain fees.
Here’s what a debt management plan looks like:
- You give the debt management company information about your current financial situation, including the amounts owed and minimum monthly payments.
- The debt management company negotiates new monthly payment terms, interest rates, and fees with your creditors.
- The debt management company becomes the payer on your accounts.
- You make one single payment to the debt management company each month.
- The debt management company uses that money to pay your creditors on your behalf.
- The process is repeated each month until your debts are paid off.
If you choose this method, you’ll need to cease new credit applications, as adding any new debts during the program can disqualify you.
| Pros | Cons |
| You only need to make one monthly payment | You can’t use for secured debt like student loans, auto loans, or mortgages |
| You’ll get outside financial guidance | You may have close your credit card accounts |
| You’ll have someone else to negotiate with creditors on your behalf | Creditors don’t have to agree to the plan, and not all will participate |
Take out a home equity loan
Best for: homeowners with equity in their home who have the discipline to repay the loan in full
If you’re a homeowner and have equity in your house, you may be able to take out a home equity loan or line of credit (HELOC) to get cash and use it toward your other debts. Just be aware that your home is used as collateral for the loan.
Since your house secures the loans, you’re likely to get a lower interest rate than what you would find with a personal loan or balance transfer credit card. However, you can also lose your home if you don’t keep up with payments, making this one of the riskiest debt consolidation methods.
When considering this method, find out whether your total debt is less than half of your income before taxes. Doing this can help you determine how much risk you’d be required to take on. If it’s more than half, it’s likely not worth putting your home on the line if you can’t repay it.
| Pros | Cons |
| Lower interest rate than credit cards or personal loans | Your home is used as collateral |
| Lower monthly payments | Risk of losing your home if you default on payments |
| Possibility for tax-deductible interest payments | Can have long repayment terms |
Take out a retirement loan
Best for: a last resort in financial emergencies
If you participate in an employer-sponsored retirement account like a 401(k), you can borrow that money in the form of a loan and use the funds to pay off your debts. Generally, you can borrow up to 50% of your balance for up to five years for a maximum of $50,000. Essentially, you’re borrowing from yourself and paying yourself back over time.
These types of loans typically have low interest rates, and the interest you do pay goes back into your account. Unlike most other debt consolidation methods, no credit check is required, so it won’t affect your credit score.
The amount you’re eligible to borrow and your specific repayment terms will vary depending on your employer’s plan. Be sure to read through what your plan offers, so you’re aware of what you’re eligible for.
While this can be a viable debt consolidation method if you’re running out of options, it’s best saved as a last resort since it requires dipping into your retirement savings. If you can’t make your payments, the amount you withdraw could be taxed, and you might have to pay an early withdrawal penalty.
| Pros | Cons |
| Low Interest rates | Unable to contribute to your 401(k) while carrying a loan balance |
| Interest paid goes back to your own account | Borrowing against retirement savings means missing out on additional growth |
| No credit check required | Subject to tax penalties if you default on payments |
How to determine if debt consolidation is a good idea
Whether or not debt consolidation is right for you depends on your financial situation and the type of debt you have.
That said, here’s when debt consolidation could be a wise move:
- You have a good credit score: A good credit score allows you to qualify for credit cards with 0% interest or low-interest loans.
- You carry high-interest debt: Debt consolidation is often well suited for those with high-interest debt, as it can help reduce how much you’re paying in interest.
- You have enough cash flow to cover each monthly payment: You should only consolidate debt if you can afford your monthly payments and pay them on time every month.
And here’s when debt consolidation may not be the best idea:
- You have a low credit score: A poor credit score makes it harder to qualify for better interest rates and loan terms.
- You can’t afford the minimum monthly payments: If you don’t have enough income to make your monthly minimum payments, you’ll end up owing more than you already do.
- You’re not ready to change your spending habits: Successful debt consolidation requires sticking to the plan and adjusting your budget and spending habits.
Debt consolidation can benefit certain people, depending on their circumstances. Do your research to understand what debt consolidation can and can’t do for you.
Debt consolidation alternatives
While debt consolidation can be smart for some, it isn’t always the best option. Here are some alternative solutions that don’t require applying for a loan or balance transfer credit card:
- Create a budget (and stick to it!): Sometimes all you need to get out of debt is a change in your current spending habits. Revisit your budget if you have one, or create one from scratch by subtracting your non-negotiable monthly expenses from your monthly income. Once you know how much you have left over each month, commit to putting as much as possible toward debt payments.
- The debt avalanche method: This approach prioritizes paying off high-interest debt first, then working your way down to smaller debts. Start by listing out all of your debts in order of highest to lowest interest rate, and pay the minimum balance on all of them. Put any extra funds you have for the month toward the highest-interest debt. Once you pay it off, move on to the next debt on your list until they’re all paid off.
- The debt snowball method: This approach focuses on reducing the number of debts you carry as fast as possible. Start by listing out all of your debts in order of the lowest balance to highest. Pay the minimum balance on all debts, then put any extra funds toward your lowest-balance debt. The idea is that paying off your smaller-balance debts sooner can create momentum that motivates you to keep working through all your debts.
Now that you know how to consolidate debt, consider whether or not it could work in your favor. Responsible debt consolidation can help you save money, pay off debt, and improve your credit score — but it’s not a magic quick fix. You’ll still need a plan for how to repay your debts for any method you choose.
Above all, focus on better financial habits like sticking to a budget, reducing needless spending, and even increasing your income to move closer to financial security.
