DIY Debt Consolidation: How to Consolidate Debt Yourself

Have you ever considered saving money (and reducing anxiety) through do-it-yourself (DIY) debt consolidation?

If so, you’re in good company. American consumers knocked $180 billion off what they owed between 2020 and 2021. Since then, though, consumer debt has risen an eye-popping $3 trillion, from $14.5 trillion in 2021 to $17.69 trillion by 2024. Delinquencies, particularly for credit card accounts, are at an all-time high as interest rates that average more than 25% blow up balances.

If you’re among those feeling debt-induced pain, consolidating credit card debt is a great way to reduce it. There are many ways to consolidate debt. Credit score, income and debt amount play a part, depending on the method. But all have one thing in common – you must understand your debt and have the discipline to come up with a plan and follow through.

“When you settle debts yourself, you can expedite the process, which will save you money in the long run,” said Jonathan Feniak, a Colorado-based attorney and financial advisor. “You can then dedicate that money to [further debt payoff] or save straight off the top.”

Understanding Credit Card Debt

Before you can tackle DIY debt consolidation, you must understand how your debt became the monster that it is.

There are as many reasons for high credit card debt as there are people using the cards. One of those most common pitfalls is using them to pay for daily expenses, like groceries. If what you charge outpaces your income, and you can’t pay off the balance every month, it adds up fast. Often people living from paycheck to paycheck feel like they don’t have a choice as their expenses outpace their income. In recent years, inflation has added to the issue, particularly among low-income and younger consumers who may struggle to pay the rent or buy groceries. But it becomes a vicious circle as the monthly credit card bill rises, continuing to eat up more income.

Other people who accumulate a lot of credit card debt simply may be using the cards without understanding the high-cost consequences of compound interest. People who have careless financial habits or don’t use a budget may fall into the credit card trap as well.

Studies also show that people who have a low level of financial literacy – which means understanding how money and spending works – are more likely to have high debt or trouble paying bills.

About half of credit card users pay off their balances every month. If you’re not one of them, every time you use that card it costs you much more than the price of the item you’re buying.

You can find the interest you’re paying on your monthly statement, which you either get in the mail or can find online with your account. You’ll see it as APR, which stands for annual percentage rate. In 2024, the average APR was above 25%.

The math is complicated, but the good news is that you don’t have to do it to see what your APR costs you in both the short and long run. By law, your credit card company is required to show it on your statement how much it will cost over time to pay off your balance, and how long it will take if you make minimum payments. That number should be enough to scare you straight into paying down your balances and being mindful about credit card use.

Here’s an example:

Let’s say you have a $5,000 balance on a card with 25% APR. You make minimum monthly payments of $120. If you don’t add any more charges on the card, it will take you 99 months (eight years and three months) to pay it down. Over those eight-plus years, you’ll pay $6,787 in interest, for a total of $11,787.

If you pay $300 a month on the card it will take you 21 months (less than two years) to pay it off, and you’ll pay $1,206 in interest, for a total of $6,206. That’s a savings of $5,581.

Your statement may also show different APRs for different uses – cash advances often have a higher APR than purchases. You also pay interest on late payments and other fees that are added to the balance.

If you can’t pay your credit card balances in full every month, you’re building a pile of debt that will ultimately cost you double, or more, what you originally paid. In the short term, It becomes an ever-increasing financial burden as you try to pay bills while meeting your monthly credit card payments.

Benefits of Consolidating Credit Card Debt

Debt consolidation comes in many forms, but in general, it is a way to join bills into one balance, so that you make one monthly payment.

Major benefits to consolidating credit card debt are:

• One payment is easier to manage and budget
• Combining debt into one payment can also be less overwhelming mentally
• Possibility of a lower interest rate
• Possibility of faster balance payoffs

How to Prepare for DIY Debt Consolidation

“Not everyone should consolidate their debt,” Ethan Keller, president of Dominion, a global network of legal and financial consultants, said. “It needs enough cash flow, solid credit, and the appropriate level of debt. Above all, it calls for dedication.”

Even if you have good credit and can manage a plan, it won’t work for those who see paid-off credit cards as an invitation to binge-spend again.

“Reduce wasteful spending,” Keller said. “Lastly, give up using credit cards.”

A successful debt-consolidation plan also involves almost obsessive commitment to repayment. It’s time to plot your course.

The steps to prepare for DIY debt consolidation are:

• Create a list of the debts you intend to consolidate. It works best if you only consolidate credit card bills, but the list may include medical bills and personal loans.
• Note each 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 major credit-monitoring agencies (Experian, TransUnion, Equifax). Each provides 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.
• 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!
• Determine what debt consolidation method is best for your situation.

Feniak said it’s important to do your homework before undertaking a DIY debt consolidation. “You need a solid understanding of your financial standing and your legal rights,” he said.

Homework includes protection from being taken advantage of. Feniak suggests becoming familiar with The Fair Debt Collection Practices Act.

“These laws don’t make debts disappear, but they limit how creditors can come after you, and knowing those limitations will help you negotiate and consolidate,” he said.

if you think you can better manage multiple cards if you had lower interest rates, consider calling the credit card companies to negotiate lower rates. They’ll respond best if you have a history of on-time payments. Know how much you owe and what you’re paying before you call. Feniak said that it helps to be a strong negotiator to undertake this on your own. “Creditors may low-ball you, and the whole process may prove far more stressful than going another route,” he said.

Homework also includes carefully considering all the options and how they work with your financial situation. Explore them below.

Options for Consolidating Credit Card Debt on Your Own

You’ve compiled your debt information, figured out your budget, considered ways to cut expenses, possibly add to income, and done your homework.

So, how do you consolidate debt?

Most debt consolidation methods involve turning several monthly payments into one monthly payment. All should have lower interest rates. There are a variety of ways to achieve those goals. Some involve taking on a loan to get rid of debt. Some involve simply tackling the debt.

The best debt consolidation method is the one that will work the best for you, eliminate your debt and save you money. Everyone’s financial situation is different, so it’s important to understand how each debt consolidation method works before you take the plunge. You don’t want to do something that’s going to make your finances, or debt, worse than it was when you started.

Personal Loans

Personal loans to consolidate debt are available through banks, credit unions, and online lenders. It’s up to you how to use the personal loan to pay off debt. The better your credit score, the better interest rate and terms you’ll get. Ideally the loan should have a lower interest rate than the debt you’re paying off. No matter the rate, having a fixed payoff period will cost you less than making payments on revolving debt.

Credit Card Balance Transfer

Credit card companies offer balance transfer cards with 0% interest for a limited time, usually 6-18 months, on balances transferred from other cards.  Typically, there is a 3%-5% transfer fee added to your balance. It’s a simple way to streamline payments and pay less in interest for the introductory period. You must have a good credit score to qualify – 690 or better is recommended. If you don’t pay off the balance during the introductory period, interest will be charged on it.

Debt Consolidation Loan

A debt consolidation loan is an unsecured personal loan that’s designated for debt payoff. Lenders often require a certain percentage of the loan, or all of it, to be used to pay debt. Many directly pay the creditors. Loans from credit unions and online lenders often have more flexible qualification standards. Credit union debt consolidation also generally has lower rates. Shop around for the best deal, including fees and other costs. Avoid debt consolidation companies that charge excessive fees and other credit repair scams.

Home Equity Loan or Line of Credit

Home equity loans and lines of credit (HELOCs) borrow against your home’s equity (the difference between value and what is owed on the mortgage), using the cash to pay off the cards at a much lower interest rate. Similarly, cash-out refinancing involves refinancing your mortgage for more than what’s owed, using cash back to pay off credit card debt. The downside to consolidating debt into a new mortgage, or adding to the current one, is that unsecured debt becomes secured debt, with your home as collateral. Can’t pay? You may lose your home. Financial advisors often warn clients not to convert unsecured debt to secured debt on a home because your home is among the possessions you can protect from creditors even in bankruptcy.

Ask Friends of Family for Help

Borrowing from friends or family is a slippery slope. The upside is that you probably won’t have to meet eligibility requirements and may get very favorable interest rate and repayment terms. The downside is that if it goes bad you may lose that relationship, or many relationships if people in your circle take sides. A written contract will ensure you and the lender know exactly what was agreed to. Stick to it.

Borrow from Retirement

Borrowing from an employer-sponsored retirement plan can be used to pay debts, but a 401(k) loan has restrictions:

• It must be repaid in five years to avoid early-withdrawal and tax penalties.
• If you leave your job, you must pay the balance owed within 60 days to avoid early-withdrawal penalties.
• It’s limited to 50% of the vested value of your 401(k)
• It can’t exceed $50,000.

It’s your money, but the loan is not cost-free. You lose interest that would accumulate on the amount borrowed until it’s repaid. If you don’t repay it, you lose it all.

Cash-Out Auto Refinancing

You may be able to refinance your vehicle – assuming you’re not upside down on the auto loan — and use the cash to consolidate debt. Unlike houses, vehicles rapidly lose value, so you may not be able to squeeze out enough cash to make it worth the risk. Shop around for the best appraisal value, interest rates and fees. Your vehicle is collateral – missed payments mean losing it. Avoid car title (pink-slip) loans, which are NOT refinancing. They’re short-term loans with very high interest rates. Default on a car title loan and the lender takes your car.

Steps to Consolidating Debt on Your Own

If you’re overwhelmed by credit card debt, or just want to save money or have more in your pocket at the end of the month, take these steps to consolidate your debt:

1. Review all of your credit card statements to understand how much interest you’re paying a month, the APRs, and other costs. Determine how much you are paying in total a month for all the debt you’ll consolidate. This will be the minimum you’ll want to pay to your debt consolidation plan.
2. Create a monthly budget (without your credit card or other debt payments you intend to consolidate), then determine how much is left over to use for paying down debt.
3. If the budget is too tight to pay your debt, find ways to cut expenses or increase your income.
4. Get your credit reports from the three credit reporting agencies and find out what your credit score is as well. Knowing where you stand will help you find the best debt consolidation option.
5. Review The Fair Credit Reporting Act and the Consumer Financial Protection Bureau’s information on debt consolidation, so that you’ll be armed with knowledge that will help you make good decisions.
6. Review debt consolidation options with your financial situation and credit score in mind.
7. Choose an option, research it, and shop around for the best deal.
8. Be disciplined in making your debt consolidation payments, so that you don’t end up in a worse financial situation.

Managing Your Finances Post-Consolidation

You’ve consolidated your debt on your own. Congratulations! But that’s only half the battle. The last thing you want is to end up back where you were, or even owing more money than you did before you started.

You’re already armed with knowledge you didn’t have before you began the journey, so you can put it to use to build a financial foundation that will sustain you and your family for years to come.

To manage your finances post-consolidation:

• Create a monthly budget that includes the debt payment. Stick to it.
• Do not use credit cards unless you can pay the balance at the end of the month.
• Be smart about spending and continue to cut expenses beyond your debt consolidation so you can build an emergency fund and save for retirement.
• Continue to improve your financial literacy and make your money work for you instead of controlling you.
• If you can’t manage your budget or make payments on your debt consolidation plan, seek help from a certified credit counselor. The National Foundation for Credit Counseling can help you find nonprofit credit counseling agencies that can help you learn how to better manage finances and what further debt management options are.

DIY Debt Consolidation Mistakes to Avoid

OK, you know what you want to do. Let’s explore what not to do. These are the mistakes others have made.

Failure to choose wisely: Make certain your consolidation loan has a lower interest rate than your current debts.

Failure to ask for help or debt consolidation advice: Consult a nonprofit credit counseling professional. If you’re a member of a credit union, talk with a personal finance specialist there.

Failure to research your options: Secured or unsecured loans? Low-interest personal loans? Zero-interest balance transfer cards? Debt management? Debt settlement? Which one works best for you? Do your homework.

Failure to shop around: Once you’ve identified your best option(s), find out who wants your business most.

Failure to finish what you start: Be realistic about your ability to keep pace with the terms of your consolidation agreement. Even if you suffer an occasional setback, you’ll be glad you stayed the course.

Failure to address the root cause: If you are choosing debt consolidation because of something beyond your control – job loss, divorce, accident, or medical emergency – great! If you are hoping, it’s the answer to the painful results of unsustainable spending – not so great. You need to confront the fundamentals of your financial choices, perhaps through professional debt counseling.

Failure to follow a repayment plan: Once you have selected the best loan with the lowest interest rate, pick the shortest possible repayment tenure.

Failure to set up an emergency fund: Avoid slipping back into unsustainable debt by feeding a savings account to be tapped only in an emergency. Note: Fixing a leaky roof or broken-down car qualify as emergencies. The newest smart phone, when your old one works fine, does not qualify.

Know what form of debt relief you’re in and how it works: “I didn’t know what I was getting into!” is an excuse, not a plan. Research and understand all options before making a final decision.

Work With a Nonprofit Credit Counseling Agency

Even if you enjoy DIY projects, you shouldn’t take the debt-consolidation plunge without good, expert advice. That doesn’t mean watching a series of YouTube videos.

You can consult with a certified credit counselor for advice on a do-it-yourself plan — OR! — you can ask help from experts about working with creditors and creating a debt management plan to eliminate your debt.

It will cost you nothing to talk to a certified credit counselor. Counselors at nonprofit credit counseling agencies are required to give you advice that’s in your best interest, rather than sell you a product. They’ll review your finances, help you create a budget, and point you to financial education resources.

The counselor will also go over other debt consolidation and management options and help you determine if one will work for you, including debt consolidation loans, debt management plans, nonprofit debt settlement, debt settlement and even bankruptcy.