Debt Consolidation

    If you need help getting out of debt, you are not alone. Although signs show an upturn in the economy, many Americans are deep in debt, and not everyone can work overtime or a second job to pay down that debt. That's where debt consolidation and other financial options come in.

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    What is Debt Consolidation?

    Debt consolidation is combining several unsecured debts — credit cards, medical bills, personal loans, payday loans, etc. — into one bill. Instead of having to write checks to 5–10 creditors every month, you consolidate bills into one payment, and write one check. This helps eliminate mistakes that result in penalties like incorrect amount or late payments.

    There are three major types of debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. These are not quick fixes, but rather long-term financial strategies to help you get out of 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?

    Take Action

    Making the decision to take action is the first step. Ignoring your debts will not make them go away; it will make your problems worse. The sooner you get help with your credit card debt and make a plan to repay, negotiate, or consolidate them, the sooner you’ll be living a life free of debt.

    Know Your Options

    A debt management plan or debt settlement should be your top options for consolidating your credit card debt, but alternatives include obtaining a debt consolidation loan, borrowing from your retirement funds or the equity in your home, and consolidating your student loans. While you can't consolidate federal student loans with other debts, including private school loans, lending institutions can consolidate private education loans with other sources of debt.

    Know the Risks

    Financial advisors tend to lean away from turning unsecured debt into secured debt, so utilizing home equity is often not considered the best option. You risk losing some or all of the assets you used to secure the debt. Similarly, you should explore all other options before choosing to withdraw money from tax-free accounts you set up for your retirement.

    How Debt Consolidation Works

    What Is The Best Way to Consolidate Debt?

    There are several ways to consolidate debt, depending on how much you owe. The best way to consolidate credit card debt under $3,000 could be to get a zero-percent interest credit card and transfer balances from high-interest credit cards over to it. You also could look at a personal loan to pay off your balances. You could get a home equity line of credit, a home equity loan or a second mortgage on your home, or refinance your existing mortgage.

    Other options include borrowing against a whole life insurance policy and borrowing against you retirement savings. The best way to consolidate a large amount of credit card debt (anything over $3,000) without taking on a new loan, is to enroll in a Debt Management Plan.

    Debt Management Plans

    Most financial experts agree that a Debt Management Plan (DMP) is the preferred method of debt consolidation. The most-recommended DMPs are run by non-profit organizations. They start with a credit counseling session to help determine how much money you can afford to pay creditors each month. The non-profit agency can help you get a lower interest rate from creditors and reduce or waive late fees to help make your monthly payment affordable. You send one payment to the agency running the DMP and they split it among all your creditors. Utilizing a debt management plan could affect your credit score. However, at the end of the 3-to-5 year process, you should be debt free, which definitely improves your score.

    Learn More About Management Plans

    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 Consolidation Loans

    How to Get a Consolidation Loan

    Banks and credit unions are good places to ask about consolidation loans, but online lending sites may be a better place to borrow. The key is to know how to consolidate your bills. Start by listing each of the debts you intend to consolidate — credit card, phone, medical bills, utilities, etc. — and what the monthly payment and interest rates are on those bills. It also helps to know your credit score.

    Once you have this information, make sure to compare lender’s rates, fees and length of time making payments before making a decision. A consolidation loan should reduce your interest rate, lower your monthly payment, and give you a practical way to eliminate debt.

    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.

    What Is Bill Consolidation?

    Bill consolidation is an option to eliminate debt by combining all your bills and paying them off with one loan. With bill consolidation, you make only one monthly payment — a good idea for when you have five, or maybe even 10 separate payments for credit cards, utilities, phone service, etc. If you consolidate all bills into one, the single payment should be at a lower interest rate and reduced monthly payment. Any savings could be used to start an emergency fund to help prevent a future financial crisis.

    How Can I Consolidate My Bills?

    Debt and bill consolidation takes patience, persistence and some organizational skills. You must start by gathering all your bills for things like medical, credit card, utilities, cell phones. Add the total amount owed on the unsecured debt. The next step is to determine how much you can afford to pay on a monthly basis, while still having enough to pay basics such as rent, food and transportation.

    When you have that number, decide whether a personal loan, debt management program or debt settlement gives you the best chance to eliminate the debt. Understand that this process normally takes between three to five years. There are no easy fixes with debt consolidation.

    When Not To Consider Debt Consolidation

    Debt consolidation is an appealing way to simplify your bill paying process, but depending on the method you choose – balance transfer on credit cards; debt settlement; secured personal loan – there are reasons it may not be the appropriate choice for all consumers.

    If, for example, you choose to pay off credit card debt with a zero-interest balance transfer to a new card, but you continue to use the new card the same way you did your old cards, you create even more debt.

    If you decide to use debt settlement, your credit score will take a severe hit that will last seven years, which will make it difficult to get a loan for a car or home in that time. Also, there will be a significant spike on interest rates for any credit cards you obtain. However, using a secured loan to consolidate bills might be the riskiest choice. If you put a home or car up as security, you may get a better interest rate, but any missed payments put you in danger of losing that car or home.

    For debt consolidation to work, you must calculate how many payments it will take and how much interest is included in those payments for you to eliminate the debt and see if the time and money involved is less than doing it your current way. It will be difficult. If you are not really committed to changing the habits that got you into financial trouble, the cost and time for debt consolidation may make the situation worse.

    Debt Consolidation FAQs

    How does a debt management program compare with a debt consolidation loan?

    What is debt consolidation refinancing?

    What type of loans can I consolidate?

    Any unsecured debt, which includes credit cards, medical bills or student loans.

    Are debt consolidation loans bad for my credit score?

    What are the best loans for debt consolidation?

    When is debt consolidation the right option?

    How do I consolidate debt and pay it off?

    Is debt consolidation bad?

    Are debt consolidation loans taxable?

    Who qualifies for debt consolidation loans?

    Does debt consolidation work on a limited income?

    What do debt consolidation companies do?

    Which debt consolidation plan is right for me?

    Can I consolidate my debt without a loan?

    Do lenders perceive debt consolidation negatively?

    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 with each one of your creditors for less than what you actually owe. While this sounds ideal, there are drawbacks. Many creditors refuse to deal with debt settlement companies and debt settlements have a huge negative impact on your credit score.

    Debt consolidation means 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.

    If you choose a debt consolidation company, be sure to get their fees and interest charges in writing.

    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 debt consolidation calculator will calculate 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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