How to Consolidate Debt On Your Own

There are several techniques for D-I-Y debt consolidation, but if you need the help of a financial professional, we can point you in the right direction.

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You don’t have to be drowning in debt to know what it describes: someone floundering in the deep end of the financial pool who’s about to go under if (s)he doesn’t latch onto a life preserver.

That could be a credit counselor, perhaps, or a debt-management company … or it could be the person in the mirror starting back at you! Did you ever consider saving yourself (and money!) through do-it-yourself debt consolidation?

The DIY method isn’t for everyone. It requires uncommon discipline, but if you have the wherewithal to create a legitimate plan, sell your creditors on the plan’s merits, and stick to the schedule of required payments, it can be done.

Debt consolidation is designed to gather assorted obligations into a single package. Done right, debt consolidation produces assorted benefits: simplifying payment deadlines, usually at a lower interest rate, and oftentimes with a lower payment than the sum of your previous minimums.

If you devise your own plan instead of turning to a bank or company that specializes in debt consolidation, you can save administrative and other fees. It also can speed up the amount of time it takes to get out of debt.

That’s especially true if you convince creditors to take a “lump sum payment” that is less than what you owe. That requires negotiation, and some creditors might not be willing to talk to you, but if they do — and you pay off the debt for less than what is owed — that could be considered a win.

However, if you go it alone, you need to craft a scheme you can afford that doesn’t leave you in greater financial jeopardy than where you began. It’s vital to weigh carefully the ramifications of your decision, especially if you use collateral such as your home equity, to make the plan work.

Eliminating credit card debt can be done. In fact, on the whole, Americans have spent 2020 hacking away at it, driving down the total we owe by $118 billion. Thanks … COVID-19?

But for all that gratifying belt-tightening, the average American household still has an eye-popping $7,938 in credit card debt, according to a study by WalletHub. And those carrying balances month to month are paying an average interest rate of nearly 15%. Consumers with only fair credit (between 580 and 669) can expect to be charged a stout 23.4% interest.

Even if you’re not struggling to keep up with timely minimum payments, staggering interest rates are a strong argument in favor of DIY debt consolidation.

How to Prepare for DIY Debt Consolidation

Do-It-Yourself Label
Again, DIY debt consolidation is not for everyone. Consumers need reasonably good credit, a fair amount of free cash flow in their budgets, and — believe it or not — the right amount of debt.

Even then, the plan doesn’t work for those who see paid-off credit cards as an invitation to binge-spend again. Instead, a successful debt-consolidation plan involves almost obsessive commitment to repayment.

Time to plot your course.

  • Create a list of all the debts you intend to consolidate. It’s probably best if it is only credit card bills, but it also might include student loans, medical bills, personal loans, and so on.
  • For each creditor, note the lender’s name, total amount owed, interest rate, and minimum monthly payment.
  • Get a copy of your credit report from one of the big three credit-monitoring agencies (Experian, TransUnion, Equifax). Each owes you one free report every 12 months.
  • Know your monthly income. (Can you increase it with side hustles?)
  • Revisit (or establish) a budget that doesn’t include the debt you plan to consolidate. Stick by it.
  • Identify expenses you can cut out or at least trim (streaming services, entertainment, dining out, recurring donations).
  • Establish how much free cash flow you have after you pay necessary expenses.
  • Stop charging. No, seriously. STOP CHARGING.
  • Do your homework: What consolidation method is best for your situation? We’ll explore the options below.

DIY Debt Consolidation Mistakes to Avoid

OK, you know what you want to do. Before we plunge into the how-to-do-it phase, let’s explore what not to do. These are the mistakes others have made — including one of legendary proportions — you must avoid.

  • Failure to choose wisely: Make certain your consolidation loan packs a lower interest rate than your current debts. A lower overall monthly payment achieved simply by stretching out the repayment period is no bargain if you’re saddled with an unfavorable interest rate.
  • Failure to ask for help or debt consolidation advice: You don’t know what you don’t know. You’ve made a good start by conducting online research, but you won’t ask questions of yourself because you don’t know to ask. That’s why your smart strategy includes consulting a nonprofit credit counseling professional and, if you’re a member, getting with a personal finance specialist at your credit union.
  • Failure to research your options: This portion of the process ties into the previous topic. With good advice, you’ll know a variety of debt-consolidation strategies are available. Secured or unsecured loans. Low-interest personal loans. Zero-interest balance transfer cards. Debt management. Debt settlement. Do your homework.
  • Failure to shop around: Once you’ve identified your best option(s), find out who wants your business most. You have something — repayment of your debt — to sell. Who’s going to offer you the best terms? If you don’t shop hard, you won’t know.
  • Failure to finish what you start: As the disembodied voice in “Field of Dreams” told corn farmer and baseball acolyte Ray Kinsella, Go the distance. Be realistic about your ability to keep pace with the terms of your consolidation agreement. Keep heart even if you stumble over the occasional setback. You’ll be glad you stayed the course through the finish line.
  • Failure to address the root cause: Are you choosing debt consolidation because of something — job loss, divorce, accident or other medical emergency — beyond your control? Or are you hoping to get out from under the painful results of unsustainable spending? If the latter, you need more than a consolidation loan. You need to confront fundamentals of your financial choices, perhaps through professional debt counseling.
  • Failure to follow a proper repayment plan: Your goal isn’t — or shouldn’t be — simply to alleviate current stress. Debt consolidation should be the first step toward getting out of debt completely. Once you have selected the best loan with the lowest interest rate, pick the shortest possible repayment tenure. The longer you stretch it out, the more you’ll pay in interest.
  • Failure to set up an emergency fund: Avoid slipping back into unsustainable debt: Feed a savings account to be tapped only in an emergency. (Note: A leaky roof or an overheating car qualify as emergencies. Really, really, really needing a large mocha Frappuccino is not.)
  • And then there’s this, perhaps the ultimate epic fail: Know what form of debt relief you’re in and how it works. Touted as a “nationally recognized financial expert,” blogger/freelancer Miranda Marquit failed to read the fine print, and got royally slammed for it. Thinking she was signing up for debt consolidation, Marquit instead turned over her finances to a debt settlement company. By the time she recognized her error, she was being sued for nonpayment and her credit score had tanked 100 points.

Credit Card Balance Transfer

Consolidating a handful of credit card balances to a single, zero-interest credit card is an uncomplicated way to streamline your payments and pay less in interest. However, it comes with an imposing qualifier: You must have a good credit score – 690 or better is recommended – and that poses a problem if you’re behind on payments.

If you do have a good score, you probably receive offers from card issuers enticing you to transfer your balances to their cards, often with a no-interest grace period of 12-18 months or more. Some even come with no transfer charges.

Of course, you need to read the fine print carefully so you know when the grace period ends and what the interest rate on the remaining balance will be. In November 2020, you could count on the interest rate ranging from 13%-26%.

Do the math. There is no point transferring balances to a single card if you don’t save money. Even if you decide it makes sense, you need a card with a large enough credit line to handle the debts you’re transferring. If you do, or you can convince a card issuer to increase your credit line, it might be a good way make your debts more manageable.

 Debt Consolidation Loan

Lenders, including banks and credit unions, offer loans designed to replace an assortment of consumer debt with a single loan, usually at a lower interest rate. Though debt consolidation loans work for some, it’s important to understand each lender’s terms and the potential risks if you miss payments.

Banks and credit unions are the best source of unsecured loans, but they tend to be selective about who they approve. People with the best credit scores get the lowest interest rates. If you have several credit cards with balances that carry 25% annual interest rates and your bank offers a loan to pay off that debt with a consolidation loan carrying an 8% rate, taking the loan would work well. Credit unions tend to offer better deals than banks, so shop around.

Online lenders are another option. These lenders often approve a loan in a few days and will accept borrowers with lower credit scores than banks or credit unions. Beware: The interest rates may be higher.

The worst option, one you should probably avoid, involves storefront lenders and debt consolidation companies that add extra fees for originating loans and charge much higher interest rates. Avoid for-profit companies and always carefully review the terms.

Before taking a debt consolidation loan, understand about the repayment period, whether the interest rate during repayment is fixed or variable and if you can afford the monthly payments. Also, avoid loans that demand collateral. The debt consolidation loan business has a spotty reputation and there are many scam artists. You must be diligent: Avoid credit-repair scams.

Home Equity Loan or Line of Credit

Home equity loans and their variant, home equity lines of credit (HELOCs) — formerly known as second mortgages — allow you to borrow against home equity (the difference between how much your home is worth and how much you owe) usually at rates far lower than you’re paying on credit card debt.

The downside — your house secures the loan and you could lose it — is why you get a lower rate on an equity loan than credit card debt. If you are comfortable with that, equity loans allow you to make regular, predictable payments. If you have sufficient equity in your home and you meet other income and credit standards, you can take a loan or get a credit line that will allow you to transfer all your credit card debt to a home loan you can repay in regular installments.

The downside is the collateral. If for some reason you can’t afford the payments in the future — perhaps because of an illness or job loss — you could lose your home through foreclosure. Financial advisers often warn clients not to convert the unsecured debt on credit cards to a secured debt on your home for that reason: Your home is among the possessions you can protect from creditors even in bankruptcy.

The same holds true for another home loan option, cash-out refinancing. In this case, you refinance your primary mortgage, turning it into a larger loan with, hopefully, a lower interest payment. You use the cash you take out of the refinancing to pay off your credit card debts. (Lenders sometimes make paying off listed debts at closing — you never see the cash — as part of approving the loan.)

Again, the strategy turns unsecured debt into secured debt, a risky maneuver.

Ask Friends or Family for Help

We don’t know the nature of your relationships, but know that the moment borrowing from a friend or family member pops into your head: Things will change.

Make certain you can afford, and will deliver on, the repayments. Discuss, upfront, what happens if you can’t live up to your bargain. You may conclude the risk to your association is too steep a price.

On the upside, you’re unlikely to have to meet minimum eligibility rates, and you may end up with a very favorable interest rate.

Borrow from Retirement

Borrowing from an employer-sponsored retirement plan such as a 401(k) loan gives you access to money that can be used to pay debts. Before considering this alternative, understand restrictions that apply to retirement-account borrowing.

  • You have five years to fully replay a 401(k) loan or face early-withdrawal and tax penalties.
  • If you leave your job for any reason, you have to repay the loan balance within 60 days or pay early-withdrawal penalties.
  • You can’t borrow more than 50% of the vested value of your 401(k), and your loan can’t exceed $50,000.
  • If your 401(k) vested balance is $10,000 or less, you can borrow the full amount. Your employer can charge a reasonable interest rate on the loan, and repayments of principal and interest must be made at least quarterly.

One advantage to a retirement account loan is that you are borrowing from yourself, which means the debt isn’t part of your credit report and won’t appear on your credit report.

Remember: This is your retirement money. If you fail to repay it, you will lose the money. Even if you do repay the loan, you will lose whatever growth the amount you borrowed might have accrued if the money remained in your account.

In short, don’t get the idea that borrowing from your retirement account is a terrific idea.

Cash-Out Auto Refinancing

Cash-out auto refinancing works similarly to a cash-out mortgage refinancing: You refinance your car/truck/SUV — assuming you’re not upside down on the loan — and use the cash to consolidate debt.

Again, shop hard. Different lenders may appraise your vehicle differently, affecting your available equity, and you’re likely to encounter a range of interest rates and fees.

Also again, if your vehicle becomes collateral in your debt-consolidation plan and you can’t keep up with the payments, you’re putting your reliable transportation at risk.

Whatever you do, do not confuse cash-out auto refinancing with car title (or “pink-slip”) loans — short-term loans at notoriously high interest rates in which the lender can take your car if you default. Avoid car title loans at any cost.

Work with a Nonprofit Credit Counseling Agency

Even if you’re someone who enjoys other DIY projects, you shouldn’t take the debt-consolidation plunge without good, expert advice. (No, that doesn’t mean watching a series of YouTube videos. Debt consolidation isn’t like changing a headlight.)

You can consult with a credit counselor for advice on a do-it-yourself plan or — OR! — how you would benefit by getting hands-on help from experts about working with creditors and creating a debt management plan to eliminate your debt.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at


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