What Is Debt Consolidation, and Should I Consolidate?

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What is Debt Consolidation? and Should I Consolidate?
Debt consolidation rolls multiple debts into a single payment. It is a great idea if you qualify for an interest rate at a lower level.
Written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar was a former special assignment writer for NerdWallet. She also wrote a syndicated column on millennials and money, and focused on personal loans as well as consumer credit as well as debt. Prior to that, she was an editor at The Washington Post. Her work has appeared in newspapers such as the Miami Herald and USAToday. Amrita holds a master's degree of journalism at the University ofMissouri.





Nov 30, 2022


Edited by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the core personal finance team at NerdWallet. Prior to joining NerdWallet, she worked for 18 years with The Oregonian in Portland in positions such as copy desk chief and team leader for design and editing. Previous experience included copy editing and news for a variety of Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism in Iowa's University of Iowa.







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Debt consolidation rolls multiple debts, typically high-interest debts like credit card balances in one payment. It could be an ideal option for you if it is possible to obtain a lower interest rate. That will help you reduce your debt total and help you organize it so that you are able to pay it off more quickly.
If you're facing some debt that's manageable and want to organize multiple bills with different interest rates, payments and due dates Debt consolidation is an effective strategy that you can do by yourself.
Important takeaways
How do you consolidate debt
There are two ways to consolidate debt both of which combine your debt payments into one bill each month.
You can transfer all your debts onto this card, and pay the balance completely during this promotional time. You will likely need good or excellent credit (690 or greater) to be eligible.
Take advantage of a fixed-rate loan : Use the money from the loan to pay off the debt, then pay back the loan with installments, over a predetermined time. You may be eligible for a loan even if you have poor or fair credit (689 or lower) However, borrowers with higher scores will likely qualify for the lowest rates.

Two additional ways to consolidate debt is taking out a or . However, these two alternatives involve risks to your home or your retirement. In any case, the best option for you will depend on your credit score and profile, as well as your personal situation .
>> MORE:
Debt consolidation calculator
Use the calculator to figure out whether it makes sense for you to consolidate.
If debt consolidation is a smart move
A successful consolidation strategy is dependent on the following factors:
Your monthly debt payment (including your mortgage or rent) don't exceed 50 percent of your monthly gross income.
Your credit score is sufficient to get you credit cards with zero-interest period or low-interest debt consolidation loan.
The cash flow you have is constantly covering payments toward your credit card.
If you opt for a consolidation loan and you decide to repay it, you can pay it back in just five years.

Here's an example of when consolidation is logical: Let's say there are four credit cards that offer rates of interest ranging from 18.99 percent to 24.99%. Your payments are always made punctually, so your credit is good. You could be eligible for a debt consolidation loan with a rate of 7%which is a significant reduction in interest rate.
For many, consolidating offers a way to see an end. If you're taking an loan that has a 3-year period it is likely to be paid off within three years -- assuming you make your payments punctually and control your spending. Conversely, making minimum payments on credit cards could lead to some time before they're fully paid and you'll be paying higher interest rates than the original principal.
Readers also ask
Is it an excellent option to combine credit cards?

Consolidate your debts if you are able to obtain an loan with better terms, or it can help you to pay your bills on time. Just make sure this consolidating is part of bigger plan to get out of debt , and that you don't rack into new debts with the credit cards that you've consolidated. Read about .




What is a debt consolidation loan function?

A personal loan lets you pay off your creditors on your own, or you can use the services of a lender who will pay directly at your creditor. Learn about the steps to .




Do debt consolidation loans hurt your credit?

Debt consolidation can help your credit if you make on-time payments or consolidating the balances on your credit cards. Your credit could be affected in the event that you rack up debt on your credit cards and close all or most of your remaining cards, or fail to pay your debt consolidation loan. Learn more about .







When debt consolidation isn't worth it
Consolidation isn't a silver bullet for debt problems. It doesn't address excessive spending habits that create debt in the beginning. It's also not the solution if you're and have no chances of paying off the debt by making smaller payment.
If the debt you're carrying is small -- you can be able to pay it off in six months to a year , at the current rate and you'd save just the amount you'd save in the process of consolidating, you shouldn't be concerned.
Consider a DIY debt-payoff option instead, like the . You can use a to experiment with various options.
If the sum of your debts exceeds 50% of your earnings and the calculation above reveals that debt consolidation is not your best option, you're better off treading the water.
>More: Sign up with NerdWallet to view your current payment schedule and breakdown of your debt all in one place.
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About the author: Amrita Jayakumar is a former writer at NerdWallet. She was previously employed by The Washington Post and the Miami Herald.







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