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- Debt consolidation is paying off multiple debts with one large debt at a lower interest rate.
- You can consolidate debt using one of the best debt consolidation loans.
- Consolidating debt will add a hard inquiry to your credit report and affect your credit utilization.
Having multiple debts, all at different interest rates with different payment dates, can be stressful and expensive. One payment that falls through the cracks and ends up on your credit report can hurt your credit score.
Instead of dealing with all these debts, it may be worth your time to consolidate your smaller debts into one large debt with a lower interest rate. This can save you money, but consolidating your debt isn’t a decision you should take lightly.
Debt consolidation loan options
If you decide to move forward with debt consolidation, you’ll have one of two options: consolidation loan or balance transfer credit card.
Consolidation loan
One of the best options for debt consolidation is a personal loan. These unsecured loans let you consolidate multiple debts into a new loan with a fixed interest rate, fixed monthly payment, and a fixed repayment period. This means you’ll know exactly how much you owe each month and when your debts will be paid off.
You can shop for the best personal loan rates on marketplaces like SoFi. As mentioned earlier, you will have a rate shopping window where all the hard inquiries that lenders pull within a certain period of your first application will be calculated into your credit score as one hard inquiry.
Most personal loans let you borrow up to $35,000, then repay it over three to five years (terms vary based on the lender you choose).
Personal loans are best for:
- Consumers who have a lot of debt to pay off over several years
- Anyone who wants a fixed interest rate, fixed payment, and fixed payoff date
- People who prefer to stop using credit while they pay down debt
See our picks for the best personal loans »
Balance transfer credit cards
Balance transfer cards offer another smart way to consolidate debt and save money on interest. These cards, also known as 0% APR cards, allow you to transfer your balances on other credit cards onto one card that usually comes with an introductory 0% APR which can last anywhere from 12 to 21 months.
You may have to pay a 3% or 5% balance transfer fee for the privilege, but the price can be well worth the interest you save. Also, note that some balance transfer cards don’t charge fees if you transfer your balances within a specified amount of time.
Balance transfer cards are best for:
- Consumers who have the discipline to stop using credit cards after they transfer a balance
- Anyone willing to attack their debts with force during their card’s introductory offer period
- People who have a smaller amount of debt they can pay off in 12 to 21 months
How to consolidate debt
Let’s walk through how to consolidate debt step-by-step:
1. Determine if you should consolidate debt
If you have a considerable number of debts, consider debt consolidation. However, while simplifying your debt may increase your quality of life, that sole reason shouldn’t justify going through the consolidation process, especially when there are debt-tracking services that can help you manage your debts. Some of them, like Tally, for example, are even free.
You should consolidate debt mainly to get a better interest rate. Unfortunately, it’s hard to determine your APR on any credit consolidation products since many lenders only tell you what interest rate you qualify for once you apply. That said, your interest rates will be more favorable the higher your credit score is.
That said, the credit scoring algorithms give you a rate-shopping window when applying for loans. This means that you can apply to multiple loans within a short period of time, within 14 to 45 days, without triggering a hard inquiry on your credit report for each application. Instead, all those applications will be calculated as a single inquiry. This allows you to compare rates between lenders and find the best deal.
Additionally, balance transfer credit cards usually come with a 0% introductory APR period which generally lasts for 12 to 21 months, depending on the card.
Related: The best personal loans for bad credit »
2. Apply and pay off your debt
Once you’ve made your choice, you need to apply for your chosen debt consolidation product. As you are essentially opening a new line of credit to pay off your other credit accounts, applying for these loans will trigger a hard inquiry on your credit report.
Once you get approved, you will need to manage your debt accordingly. Consolidation loans give you more structure in your repayment plan, but reaping the benefits of a balance transfer requires more discipline on your part. You will need to be aggressive with your credit card debt and try to pay off the entire balance within the introductory period.
How consolidating debt affects your credit score
Depending on how your credit report looks, consolidating debt may affect your credit score in several ways.
The most apparent consequence of using a debt consolidation product is the hard inquiry it will add to your credit report. Consolidation loans and balance transfer credit cards, while serving a specific function, are still lines of credit that will result in a hard pull on your credit report. This will lower your credit score by a few points, provided you haven’t opened any other lines of credit recently.
A balance transfer credit card also has the potential to affect your credit utilization ratio, the ratio between the credit you’re using and your total available credit. Generally, you want to keep this under 30%, though every dollar into your credit limit counts against your credit score. The credit scoring algorithms such as FICO and VantageScore look at your credit utilization on revolving credit accounts overall and for each account.
Let’s say you have three credit cards with the following balances and credit limits:
- Credit card 1: $2,000 out of a $4,000 limit.
- Credit card 2: $1,000 out of a $3,000 limit
- Credit card 3: $2,000 out of a $10,000 limit.
Your respective ratios would be 50%, 33%, and 20%, respectively, and an overall utilization ratio of 29.4%. Now you consolidate those debts onto a balance transfer card with a $10,000 limit. Now you have three cards with a 0% utilization ratio and one with a 50% utilization ratio. Additionally, your overall utilization ratio has dropped to 18.5%.
A consolidation loan’s effect on your utilization ratio may shake out differently based on how much debt you have, how many credit cards you have, and the credit limit on your balance transfer card. Like your interest rates, your credit limit also varies based on your credit score.
Is debt consolidation right for you?
Debt consolidation may be right for you if you are having trouble keeping track of multiple debt obligations, or if you believe your credit score improved and you can net a better rate. Debt consolidation is great for borrowers who want to get their financial lives on track in a streamlined process.
What is debt consolidation?
Debt consolidation is the process of combining several debts into a single debt at a lower interest rate. This can be helpful if you have several bills with multiple due dates to remember. However, the real benefit of debt consolidation is the money you’ll save in interest. That’s because the average credit card interest rate is over 20%, but the best debt-consolidation loans may be able to consolidate that debt with an interest rate as low as 5.99%.
The interest savings you’ll garner depend on how you consolidate your debts and your credit score. Each option can help you pay off debt faster and save money on interest, but only if you use them to your advantage — and they’ll be the most useful if you access them at the beginning of the process.
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Alternatives to debt consolidation
There are other ways to get control of your debt aside from debt consolidation.
Debt settlement
If you’re drowning in debt and consolidating it isn’t an option, consider a debt settlement service. Working yourself out of a financial hole can be difficult, but you have opportunities to do so. Some options include:
Rework your budget
Oftentimes, there may be unexpected room in your budget to put toward your debt if you reallocate your spending to prioritize doing so. You may be able to cut down on discretionary expenses, or if that isn’t an option, pick up a little extra work in the gig economy to get the extra cash you need. You can use any of the best budgeting apps to track your spending habits, find ways to spend less and save more, and budget effectively.
Alternatives to balance transfer credit cards and loans
It’s also possible to consolidate your debt using a home equity loan or home equity line of credit (HELOC). While these options come with lower interest rates than credit cards and some additional benefits such as no origination fees or annual fees, these can be impractical and risky methods for debt consolidation. This is because you need a lot of equity in your home to qualify. Also note that you’re putting your home up as collateral for these loans, meaning you risk foreclosure if you don’t repay.
You may also try a debt settlement plan if you simply have too much debt. This will take a heavy toll on your credit score, but you may emerge from the process with less debt. Unfortunately, there’s no guarantee that your creditors will agree to a debt settlement.
Debt consolidation frequently asked questions
What credit score do you need to consolidate debt?
You’ll want at least a good credit score when applying for a balance transfer credit card, which starts at 670 for FICO and 661 for VantageScore. That said, if you’re trying for a better interest rate than the ones you have on your current cards, you’ll want the highest credit score possible.
What is the easiest way to consolidate debt?
The easiest way to consolidate debt is by finding a lender who will work with you to do so, or one that specializes in debt consolidation, like Happy Money and Reach Financial.
Can I put all my debt into one payment?
Yes, many lenders will let you roll all of your debt into one payment. However, you won’t be able to combine debt like personal loans and student loans into a singular payment.
Why can’t I get a loan to consolidate debt?
You may not be able to get a loan to consolidate debt if your credit score isn’t in the best of shape. Some lenders have more stringent eligiblity requirements than others.
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