4 Types of Debt You Can Consolidate | Bankrate (2024)

Key takeaways

  • Debt consolidation can make repayment easier by consolidating multiple accounts into a single one.
  • Consolidating debt can save you money on interest and help you get out of debt faster, depending on your situation.
  • Unsecured debt, such as credit cards, student loans, medical bills and high-interest loans can all be consolidated.

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. You’ll also have a single payment to keep track of instead of several.

You can consolidate credit card debt

Paying down your monthly credit card balance on time and in full is the best way to improve your score and avoid paying interest.

However, those who have multiple high-interest credit cards and borrowers who have a hard time meeting all of the monthly payments may benefit from debt consolidation.

Consolidating your credit card debt simplifies your repayment process. It can also save you thousands of dollars in interest accrual, as personal loans have an average interest rate of 12.18 percent.

Due to high inflation and historic interest rate hikes, the average credit card interest rate has climbed to nearly 21 percent. Now more than ever, borrowers in good credit health should consolidate their debts if they’re offered a lower interest rate through a personal loan.

Financial benefits

When you consolidate, it makes sense to start with the most expensive debts first. That could be your credit card accounts due to the interest rates alone. When offered a debt consolidation loan with a lower rate than your original debts, you could save a significant chunk of change due to the decreased rates.

Cost savings

Using a low-interest personal loan to pay off pricey credit card debt has the potential to save you a lot of money. For example, if your annual percentage rate (APR) is 16.00 percent on your credit card and you consolidate $10,000 in debt with a new, 24-month personal loan with a 7.50 percent percent rate, you could save:

  • Nearly $1,100 in interest fees
  • Nearly $50 per month

Faster payoff

If you qualify for a low-interest personal loan, you could pay off your debt in a significantly shorter amount of time.

Credit benefits

Thirty percent of your FICO Score is set by how much of your available credit you’re using, also known as your credit utilization ratio. If you’re using most of your available credit, it can be harder to get approved for other forms of debt and can lower your score.

With a consolidation loan, the amount of debt owed would still be on your credit report. However because personal loans are installment loans, they don’t impact your score as severely as credit cards. Consolidating your debt and making the monthly payments is a sure-fire way to quickly increase your score by lowering your utilization levels.

You can also use a balance transfer credit card to pay off your outstanding credit card debt. If you have good credit, you may be able to qualify for a balance transfer offer with a low or 0 percent interest rate for six, 12 or even up to 24 months.

However, because the new balance transfer card is still a revolving account, you probably won’t see as much of a credit score benefit if you opt for this as you would with a personal loan. Plus, if you don’t pay down the balance by the end of the offer period, you could find yourself stuck with more high-interest debt down the road.

You can consolidate student loans

Student loan consolidation is a popular loan management option among borrowers; it simplifies repayment by condensing multiple loans and can save money on interest.

However, consolidating your student debt isn’t the solution for every borrower. In some situations, it causes more harm than good.

You can consolidate both federal and private loans, but when it comes to federal loans, you should try consolidating them through the Department of Education. If you consolidate federal student loans with a private lender, you’ll lose all benefits and protections that are available for federal student loan borrowers. These include income-driven repayment plans and access to forgiveness programs.

Student loan consolidation may be a good fit if you:

  • You have high-interest private student loan debt
  • Your new loan (whether federal or private) carries a much lower APR than your current student loan debt.

See related:How to consolidate student loans

Financial benefits

The amount of interest you pay on student loans can add up over time, but consolidating can give you the financial relief you need.

Lower interest rate

You might be able to secure a lower interest rate on a student loan consolidation. The more money you owe in student loans, the more money you stand to save by consolidating to a new loan with a lower interest rate.

Credit benefits

One of the factors that scoring models pay attention to is the number of accounts with balances on your credit report. Known as your credit mix, it makes up 10 percent of your FICO score; while it’s not the largest scoring factor, it’s still important to keep an eye on how many accounts you have open.

By reducing your number of outstanding accounts, you’ll likely see your credit score improve. While it probably won’t jump significantly from this factor alone, it’s likely that you’ll see a credit score increase of at least a few points.

Consolidating your student debt can also save your credit report in the long-run if you miss your monthly payment and it shifts to delinquent status. Even though you’re only making one payment to your lender, you’re paying down all of your loans on the repayment plan. That being said, any delinquent payments will show up on your credit report for each active student loan and will remain on your report for seven years.

When you consolidate, you only have one loan; therefore, only one account would have a delinquent payment report. While one late payment still isn’t good for your credit score, it’s less detrimental to your credit health than if you were to have past-due payments on six accounts.

You can consolidate medical debt

According to data by Peterson-KFF Health System Tracker, nearly one in 10 U.S. adults have some form of medical debt. Although medical debt doesn’t accrue interest, it could damage your credit if left unattended.

Financial benefits

If you have high medical bills that have been sitting around for a while and are unable to work out a payment plan with your medical provider, consolidating may be a good option to pay off that debt.

Make repayment more manageable

There are a few ways you can go about consolidating medical debt, but a 0 percent interest credit card or personal loans are two of the most common ways to do it.

If you’re struggling with medical bills that are on the higher side, consolidating can make repayment easier by rolling multiple accounts into a single monthly payment.

On the downside, consolidating medical debt means you’ll most likely pay interest on it — at least if you pursue the personal loan route. Still, if these bills have been sitting there for a while, it may be worth a try.

Credit benefits

Medical debt is not reported to the credit bureaus. However, if your medical provider sends the account to collections, it could end up in your credit report. It’s worth noting that this scenario only applies to balances of $500 or more, and that have been unpaid for a year or more, after your doctor’s appointment.

By consolidating high medical bills, you can avoid getting negative marks on your report that could result from the account being sent to collections.

You can consolidate personal loans

Whether you’re trying to simplify your finances or get out of debt quicker, it might make sense to consolidate high-interest personal loans. This is especially true if your credit and income have improved since you first took out those loans.

Financial benefits

The interest rate on personal loans is most competitive if you have good or excellent credit. But if your credit score is lower, you’ll likely receive a hefty rate that increases your monthly payment.

Save on interest

If you’ve taken out personal loans in the past, you might be able to save money on interest by securing a new loan with a lower APR. It only makes sense to consolidate if you’re offered a lower interest rate. So, prequalify with as many lenders as possible before officially applying.

Many lenders offer prequalification. It allows borrowers to see their eligibility odds and predicted rates with no hard credit inquiry. Unless you’re certain that you’ll be offered a lower rate, don’t apply to multiple lenders that don’t offer prequalification. You risk multiple hard-credit inquiries and failed applications.

Credit benefits

Because personal loans are installment accounts — not revolving — consolidating these loans into a new personal loan won’t lower your credit utilization rate. Your scores might benefit slightly if you reduce your number of accounts, but the credit inquiry and the presence of a new account on your report might offset that potential score increase.

However, if you can save money by consolidating your personal loans with a more affordable installment option, it probably makes sense to go for it. Even if your credit scores do take a slight hit from the new inquiry and loan, your scores can bounce back in time as the account ages and you manage it properly.

Bottom line

You can consolidate credit card, student loan and high-interest personal loan debt to lower your interest rates and make your monthly payments more affordable. Additionally, medical debts that have been sitting for a while can also be consolidated to avoid them being sent to collections and damaging your credit.

Debt consolidation streamlines the repayment process, making it easier to manage your outstanding debt obligations, and can help improve your credit and overall financial health.

Before you apply for a loan, it’s important to educate yourself on how the process works and what debts can be consolidated. You should also analyze your budget and spending habits to ensure consolidating won’t tempt you to overspend and land you in a bigger mountain of debt.

4 Types of Debt You Can Consolidate | Bankrate (2024)

FAQs

What kind of debt can be consolidated? ›

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. You'll also have a single payment to keep track of instead of several.

Does consolidating debt 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.

How do I get rid of $30 K in credit card debt? ›

How to Get Rid of $30k in Credit Card Debt
  1. Make a list of all your credit card debts.
  2. Make a budget.
  3. Create a strategy to pay down debt.
  4. Pay more than your minimum payment whenever possible.
  5. Set goals and timeline for repayment.
  6. Consolidate your debt.
  7. Implement a debt management plan.
Aug 4, 2023

What are the conditions for debt consolidation? ›

Each lender has slightly different rules to follow, but typically, what is required to qualify for a consolidation loan includes: A credit score that meets the lender's minimum requirement (meaning: not too many late payments and no big negative notes on your credit report) You earn enough income.

What loans Cannot be consolidated? ›

Private educational loans are not eligible. A PLUS loan made to the parent of a dependent student cannot be transferred to the student through consolidation. Therefore, a student who is applying for loan consolidation cannot include the PLUS loan the parent took out for the dependent student's education.

What type of loan is best to consolidate debt? ›

Debt consolidation options
  1. Balance transfer credit card. The best balance transfer cards often come with zero interest or a very low interest rate for an introductory period of up to 18 months. ...
  2. Home equity loan or home equity line of credit (HELOC) ...
  3. Debt consolidation loan. ...
  4. Peer-to-peer loan. ...
  5. Debt management plan.
Jan 19, 2024

How much debt is too much to consolidate? ›

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.

What is a disadvantage of 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 minimum credit score for debt consolidation loan? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

How long to pay off $50,000 in credit card debt? ›

It will take 47 months to pay off $50,000 with payments of $1,500 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.

How can I pay off $30000 in debt in 2 years? ›

To pay off $30,000 in credit card debt within 36 months, you will need to pay $1,087 per month, assuming an APR of 18%. You would incur $9,116 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.

How to pay off $9,000 in debt fast? ›

7 ways to pay off debt fast
  1. Pay more than the minimum payment every month. ...
  2. Tackle high-interest debts with the avalanche method. ...
  3. Set up a payment plan. ...
  4. Put extra money toward paying off your debts. ...
  5. Start a side hustle. ...
  6. Limit unnecessary spending. ...
  7. Don't let your debt hit collections.
May 9, 2023

Why am I getting denied for debt consolidation? ›

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.

Can I be denied debt consolidation? ›

Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700 just to be safe. It's not the only factor that matters, but a low credit score could stop you from getting a debt consolidation loan with reasonable interest rates and terms.

Why am I being denied for consolidation loan? ›

An inadequate income is one of the most common reasons you could be denied a debt consolidation loan. Lenders will compare your monthly earnings to your day-to-day expenses and debt payments. In doing so, they can determine how easily your can cover your financial commitments at your income level.

What type of debts Cannot be consolidated in a debt management plan? ›

While debt management plans can be effective tools for repaying your debt, they're not always the best strategy. For example, secured debts and student loans aren't eligible for debt management plans, and credit counseling agencies may cap how much debt you can have to participate.

Can I consolidate some of my debt? ›

Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.

Why am I not eligible for debt consolidation? ›

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.

What student loans Cannot be consolidated? ›

However, it's important to note that any private student loans you have cannot be consolidated with a Direct Consolidation Loan. That's because Direct Consolidation is a federal loan program intended to help borrowers simplify their federal student loan payments.

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