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What is Debt Consolidation? and Should I Consolidate?

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What Is Debt Consolidation, and do I need to consolidate?

Debt consolidation rolls multiple debts into a single payment. It is a great option if you are eligible for an interest rate at a lower level.

Written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar is a former special assignments journalist for NerdWallet. She also published a syndicated article on millennials and money, and covered personal loans as well as consumer credit as well as debt. Previously, she was an editor at The Washington Post. Her work has been featured within the Miami Herald and USAToday. Amrita has a master’s degree in journalism from the University ofMissouri.

Nov 30, 2022

Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years at The Oregonian in Portland in positions such as copy desk chief and team director of design and editing. Prior experience includes news and copy editing for various Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in journalism and mass communications from the University of Iowa.

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Debt consolidation combines several debts, typically high interest debts like credit card debt and other debts, into one payment. It could be the best option for you if it is possible to obtain a lower interest rate. This will allow you to reduce your debt total and reorganize it so you can pay it off quicker.

If you’re dealing with a manageable amount of debt and just want to reorganize numerous bills using various interest rates, repayments and due dates, debt consolidation is an effective strategy that you can do by yourself.

The most important takeaways

How do you consolidate debt

There are two primary ways to consolidate debt, both of which concentrate your debt repayments into one monthly bill.

Take a : Convert all your debts onto this card, and pay the balance in full during this promotional time. You will likely need excellent or excellent credit (690 or greater) to qualify.

Get a fixed-rate borrower: Use the proceeds taken from your loan to pay off your debt, then pay back this loan by installments throughout a set term. You may be eligible for an loan when you have bad or average credit (689 or lower) however, those with higher scores will likely have the lowest interest rates.

Two other options to consolidate debt are using a credit card or . But both options come with the risk of losing your home or retirement. Whatever the case the most suitable option for you depends the credit scores and profile along with your .

>> MORE:

Debt consolidation calculator

Utilize the calculator to figure out whether it is logical to consolidate.

If debt consolidation is a smart move

Success with a consolidation strategy is dependent on the following factors:

Your monthly debt payment (including your mortgage or rent) do not exceed 50% of your monthly gross income.

Your credit score is sufficient to be eligible for credit cards that have a zero-interest period or a low-interest loan for debt consolidation loan.

Your cash flow is always sufficient to cover the payments towards your credit card.

If you decide to take the consolidation loan, you can pay it back in just five years.

This is a scenario where consolidation makes sense: Let’s say there are four credit cards that offer interest rates that range from 18.99% to 24.99 percent. Your payments are always made punctually, so your credit score is excellent. You might qualify for a debt consolidation loan with a rate of 7%an incredibly low interest rate.

For many people, consolidation can provide a glimpse of light at the end of the tunnel. If you take a loan with a term of three years, you know it will be paid back in three years — assuming you make your payments on time and manage your spending. Making minimum payments on credit cards could mean several months or even years before they’re fully paid, all while accruing more interest than the original principal.

Readers may also have questions.

Do you think it’s an excellent option to combine credit cards?

Consolidate your debts if it means you are able to get a loan at better terms and/or it helps you keep your payments on track. Just make sure this condensing is actually part of a wider strategy to eliminate debt , and that you don’t rack over new balances on the credit cards that you’ve consolidated. Read about .

What is the debt consolidation loan work?

A personal loan lets you pay off your creditors yourself or use the services of a lender who will pay straight at your creditor. Learn about the steps to .

Do debt consolidation loans hurt your credit?

Consolidation of debt can improve your credit score when you make on-time payments or consolidating your balances on credit cards. Your credit could be affected when you accumulate the balance on your credit card and close all or most of your remaining cards, or miss a payment on your loan for debt consolidation loan. Learn more about .

When debt consolidation doesn’t make sense it

Consolidation isn’t a silver bullet for debt problems. It can’t fix the consumption habits that cause debt in the beginning. It’s also not the solution if you’re and have no chances of paying off the debt with reduced payments.

If the debt you’re carrying isn’t too heavy, you could pay it off within six months to a year at your current rate and you’d save just an amount of money when you consolidate, don’t bother.

Try a do-it-yourself debt payoff option instead, like the or . You can make use of a to try out various options.

If the total amount of your debts is more than half your income and the calculation above reveals that debt consolidation isn’t the best option for you, then you’re better off than treading in the water.

>> >> MORE: Sign-up with NerdWallet to view your financial breakdown and future payments all in one spot.

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About the author: Amrita Jayakumar is a former writer at NerdWallet. She has previously worked for The Washington Post and the Miami Herald.

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