Debt Consolidation

Debt consolidation is a plan to simplify bill paying by combining multiple high-interest debts – usually credit cards – into a single payment. Consolidation cuts costs by lowering the interest rate on debts and reducing monthly payments.

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What is Debt Consolidation?

Debt consolidation is a debt-relief option that untangles the mess consumers make with multiple bills from multiple creditors with multiple payment deadlines. The solution combines all the bills into a single debt, which can be eliminated through a debt management program or debt settlement. It provides an opportunity to make one monthly payment – at a reduced interest rate and amount – to settle the debt.

Debt consolidation is also referred to as bill consolidation or credit consolidation. The consumer can choose to consolidate with or without the help of a loan.

It is a long-term financial strategy to help you get out of debt. Allow 3-5 years to completely eliminate debt.

When done correctly, debt consolidation can:

  • Lower your interest rates
  • Lower your monthly payments
  • Protect your credit score
  • Help you get out of debt faster

How to Consolidate Your Debt?

Assess Your Credit Card Debt

Compile all your credit card bills and calculate a) total amount owed; b) average interest rate being paid; and c) total monthly payment for cards. This gives you a baseline for comparison purposes. It only works if you lower the interest rate on your debt and reduce your monthly payment.

Review Your Budget

If your monthly income is higher than expenses, you may be able to handle the problem yourself without consolidating debt. If you don’t have a budget, call a nonprofit credit counseling agency. They will coach you through the budget-making process and their service is free.

Make the Right Choice

The three major choices for consolidating debt are a loan, a debt management plan or debt settlement. Each one has pros and cons. Know what you’re getting into before you commit to one.

Stick with It

Consolidation is not a quick fix. The loans usually run 3-5 years. Debt management programs take at least three years. Debt settlement can run 3-5 years. Compare interest rate, monthly payment and pay off time before making a decision.

What Is The Best Way to Consolidate Debt?

How much money you owe and your available resources dictate the best option for consolidating debt.

If your credit card debt is over $5,000, a debt management plan or debt consolidation loan are very good choices. Both plans are based on reducing interest rate paid on the debt, thus making it easier to afford monthly payments. The difference is that there is no loan involved in a debt management plan.

If your credit card debt has ballooned to an unmanageable figure - a number so high that you can barely afford the minimum monthly payments - debt management and a debt consolidation loan are still in the mix, but it would be wise to add debt settlement. If you own a home, a home equity loan also is an option.

If your credit card balance is under $5,000 - and you're committed to pushing it down to zero - a zero-percent interest credit card balance transfer would be another choice. However, those cards usually go to customers with very high credit scores, charge a 3%-5% balance transfer fee and have an introductory period lasting 12-18 months before regular interest rates apply.

Discover Which Debt Consolidation Method Is Right For You

Contact A Credit Counselor

Debt Consolidation Loans

A debt consolidation loan (DCL) allows you to make one payment to one lender in place of multiple payments to multiple creditors. A debt consolidation loan should have a fixed interest rate that is lower than what you were paying, which reduce your monthly payments and make it easier to repay the debts. There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, personal loans, and consolidating student loans. It is a popular way to bundle a variety of bills into one payment that makes it easier to track your finances. There are some drawbacks — you could face a longer repayment period before you finish paying off the debt — but it’s definitely worth investigating.

Learn More About Debt Consolidation Loans

Debt Consolidation and Credit Cards

Credit card debt is typically the largest cause of consumer financial problems and also the form of debt easiest to consolidate. Of the estimated 190 million Americans who had credit cards in the summer of 2018, 60% carry a balance from month-to-month and their average balance is $8,000.

That makes more than 100 million credit card carrying consumers prime candidates for some form of debt consolidation.

How to Consolidate Credit Card Debt on Your Own?

If you have a very good credit score (700 or above), the best way to consolidate credit card debt is to apply for a 0% interest balance transfer credit card. The 0% interest is an introductory rate that usually lasts for 6–18 months. All payments made during that time will go toward reducing your balance. When the introductory rate ends, interest rates jump to 13–27% on the remaining balance. Be aware, however, that balance transfer cards often charge a transfer fee (usually 3%), and some even have annual fees.

Another DIY way to consolidate your credit card debt would be to stop using all your cards and pay using cash instead. This can allow you to set aside a portion of your income each month to pay down balances for each card, one at a time. When you have paid off all the cards, choose one and be responsible with how you use it.

How Can I Consolidate My Bills?

The first step toward bill consolidation is to identify which bills you want to include – credit cards usually top the list – then calculate your total monthly payment and the interest rate you pay on each card.

The next step is to determine how much you can afford to pay against the debt on a monthly basis, while still having enough for basics such as rent, food and transportation.

When you have that number, decide which form of bill consolidation is best for you – debt consolidation loan, debt management plan or debt settlement – and determine whether the monthly payment will be less than what you’re currently paying and the interest rate is lower. Understand that each of these choices normally takes between three to five years to eliminate debt.

Debt and bill consolidation takes patience, persistence and some organizational skills to turn around your financial future.

Should You Consider Debt Consolidation?

If you feel overwhelmed financially, debt consolidation is an appealing way to dig yourself out of the hole, but there is a risk that things could get worse if you choose the wrong method or can’t stay committed.

Whether you choose a loan, debt management or debt settlement, it will take 3-5 years to eliminate the debt. It is important than you undergo a behavior change that makes paying off debt more important than accumulating more of it. There are penalties for any consumers who continue recklessly spending with credit cards.

For example, a debt management program can dramatically reduce the interest rates you pay on credit card debt, however, if you fall behind on the expected monthly payments, the creditors who granted those major concessions, can revoke them immediately and you are in trouble again.

If you go with a secured debt consolidation loan using your home or car as collateral, failure to make on-time payments could mean losing the home or car, which obviously leaves you worse off than before.

If you decide to use debt settlement, you might reduce your debt by as much as 50%, but your credit score will take a severe hit that will last seven years. That could make it difficult to get a loan for a car or home in that time.

Debt Consolidation FAQs

Is debt consolidation bad?

How do I consolidate debt and pay it off?

What type of loans can I consolidate?

What are the best loans for debt consolidation?

Who qualifies for debt consolidation loans?

Can I consolidate my debt without a loan?

How does debt consolidation affect your credit?

Are debt consolidation loans taxable?

How much does it cost to consolidate your debt?

Which debt consolidation plan is right for me?

Does debt consolidation work on a limited income?

Do lenders perceive debt consolidation negatively?

What is debt consolidation refinancing?

Who can help me consolidate my debt?

Can I consolidate medical debt?

How do I consolidate my student loans?

Debt Consolidation vs. Debt Settlement

These two repayment methods are often confused with each other, but they are vastly different.

Debt settlement companies promise to negotiate a lump-sum payment for less than what you actually owe with each one of your creditors. While this sounds ideal, there are drawbacks. Many creditors refuse to deal with debt settlement companies and debt settlements are a negative factor on your credit score for seven years.

A debt consolidation loan is taking out a single loan to pay off several unsecured debts. You make one payment to the lender each month, instead of multiple payments to multiple lenders. Debt consolidation has a positive impact on your credit score as long as you don’t miss any payments.

Debt settlement companies, on the other hand, ask clients to stop paying creditors and instead send a monthly check to the settlement company that is deposited in an escrow account. When the account reaches a specific dollar goal — this sometimes takes as long as 36 months – the settlement company steps in and makes its offer to the creditor. The creditors are not bound to accept the offer. Late fees and interest payments also accumulate during this time, making the amount owed much larger.

If you choose to use a debt settlement company, you should not pay any fees until the debt has been settled. Be sure they put in writing how much you pay in fees and how long the process will take. Remember that creditors can refuse to deal with settlement companies.

Learn More About Debt Settlement
Settlement & Credit Card Companies Tip

Debt Consolidation Calculator

Will debt consolidation lower your monthly payment or save money on interest? Enter the terms on a debt consolidation loan, then enter your current terms for each individual debt. The calculator will determine the monthly payment and total interest for your debts with, and without a debt consolidation loan.

Need help choosing the best debt relief option for you?

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Staff Writer

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at


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