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

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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.

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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.

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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)

FAQs

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

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.

Is debt consolidation a good thing or a bad thing? ›

Taking out a debt consolidation loan can help put you on a faster track to total payoff and may help you save money in interest by paying down the balance faster. This is especially true if you have significant credit card debt you carry from month to month.

Will debt consolidation hurt my credit score? ›

Debt consolidation puts multiple debts into a single account to make your payments easier. Debt consolidation can lower your credit score temporarily, but your score will improve if you make payments on time. Other tools like debt management plans and bankruptcy can help you manage debt.

Is consolidation good or bad? ›

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.

Is debt consolidation a good way to get out of debt? ›

If you're overwhelmed by multiple debts, debt consolidation might be a good option. This is particularly true if you can land a lower interest rate than the average rate you pay on your current debts.

What is a disadvantage of debt consolidation? ›

Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.

Is there a downside to consolidating loans? ›

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.

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.

What credit score do you need for a 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.

What is the best debt consolidation company? ›

Best debt consolidation loans
  • SoFi: Best for fast funding.
  • Upgrade: Best for poor or thin credit.
  • Achieve: Best for quick approval decisions.
  • LendingClub: Best for co-borrowers.
  • Discover: Best for excellent credit.
  • Happy Money: Best for credit card consolidation.
  • LightStream: Best for large loans.

What are the risks of consolidation? ›

Disadvantages of consolidation loans
  • if the loan is secured against your home, your property will be at risk of repossession if you can't keep up your payments.
  • you could end up paying more overall and over a longer period.
  • you usually pay extra charges for setting up and repaying the new loan.

How much debt is too much to consolidate? ›

It generally takes a DTI of 36% or less to get the best interest rates and other terms. Many lenders won't loan to borrowers whose DTIs are over 43% at all. Even if approved, a high-DTI borrower may have to pay more interest on a debt consolidation loan than for the loans being consolidated.

Do banks do debt consolidation loans? ›

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.

How do I know if debt consolidation is right for me? ›

Only consolidate your debt if you have enough income to cover the new monthly payment. While your overall monthly payment may go down, consolidation is not a good option if you're currently unable to cover your monthly debt service.

What is the quickest way to pay off credit card debt? ›

Strategies to help pay off credit card debt fast
  1. Review and revise your budget. ...
  2. Make more than the minimum payment each month. ...
  3. Target one debt at a time. ...
  4. Consolidate credit card debt. ...
  5. Contact your credit card provider.

Why is it so hard to get a debt consolidation loan? ›

Credit Score

Debt consolidation loans for bad credit are hard to come by. 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.

Are debt consolidation programs worth it? ›

The debt consolidation loan will typically have a lower interest rate than your current debts." These loans don't just save you money, they can make your debts easier to manage. After all, you'll use them to consolidate multiple credit cards and personal loans into one, easy-to-manage account.

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.

Is consolidating good for your credit? ›

However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.

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