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What Is Debt Consolidation, and Should I Consolidate?
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What is Debt Consolidation? and do I need to consolidate?
Debt consolidation rolls multiple debts into a single payment. It is a great option if you are eligible for an interest rate at a lower level.
Written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar was a former special assignment reporter for NerdWallet. She also published a syndicated article on millennials and money, and covered personal loans as well as consumer credit as well as debt. Prior to that, she was an reporter for The Washington Post. Her work was published in The Miami Herald and USAToday. Amrita has a master's degree in journalism from The University ofMissouri.
Updated Nov 29th, 2022 at 5:12PM PST
Edited by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt 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 roles including copy desk chief and team editor and designer. Previous experience included copy and news editing for many Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism at the University of Iowa.
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Debt consolidation combines multiple debts, typically high-interest credit card bills in one payment. It could be an ideal option for you if you are able to find a lower rate of interest. It will also help reduce the amount of debt you have and reorganize it so you are able to pay it off quicker.
If you're dealing with a manageable amount of debt and want to organize multiple bills with different interest rates, payment dates and due dates, debt consolidation is a sound approach that you can do on your own.
Key takeaways:
How do you consolidate debt
There are two main ways to consolidate debt both of which combine your debt payments into one monthly bill.
Take a : Convert all your debts onto this card and then pay the balance in full within the promotional period. You'll likely require excellent or good credit (690 or higher) to be eligible.
Choose a fixed rate borrower: Use the proceeds from the loan to pay off your debt, then pay back the loan in installments over a predetermined time. You can qualify for an loan if you have bad or fair credit (689 or less), but borrowers with higher scores will likely qualify for the lowest rates.
(image: https://upload.wikimedia.org/wikipedia/en/7/7b/Payday2cover.jpg)Another option to consolidate debt is taking out a or . However, these two options involve the risk of losing your home or your retirement. Whatever the case the most suitable option for you depends on your credit score and profile, along with your .
>> MORE:
Debt consolidation calculator
Utilize the calculator to figure out whether it is logical to consolidate.
If debt consolidation is an effective strategy
Success with a consolidation strategy depends on the following:
Your monthly debt payments (including your rent or mortgage) do not exceed 50 percent of your gross monthly income.
Your credit is good enough to get you credit cards with zero-interest period or low-interest consolidation loan.
Your cash flow is always sufficient to cover the cost of your debt.
If you decide to take a consolidation loan, you can pay it off within five years.
Here's a scenario when consolidation is logical: Let's say there are four credit card accounts with interest rates ranging between 18.99 percent to 24.99 percent. You always make your payments punctually, which means your credit score is excellent. You could be eligible for an unsecured debt consolidation loan at 7% -which is a significant reduction in interest rate.
For many people, consolidation offers a way to see an end. If you choose to take out an loan with a term of three years then you are certain that it will be paid back in just three years assuming you make your payments punctually and are careful with your spending. Making minimum payments on credit cards could lead to some time before they're fully paid, all while accruing more interest than the original principal.
Readers may also have questions.
Is it an ideal idea to consolidate credit cards?
Consolidate your debts if you can get an loan with better terms, or it can help you to pay your bills on time. Make sure that this consolidating is not part of a wider plan to reduce the debt and to avoid running up new balances on the credit cards you've consolidated. Learn more about .
How does an debt consolidating loan work?
A personal loan lets you pay your creditors on your own, or you can use a lender who sends cash directly to your creditors. Find out the steps to .
Do debt consolidation loans hurt your credit?
Debt consolidation could help your credit score when you make timely payments or consolidating the credit card balances. Your credit could be affected when you accumulate the balance on your credit card, close most or all of your remaining cards, or fail to pay the debt consolidation loan. Find out more about .
If debt consolidation isn't worth it, then don't do it.
Consolidation isn't a silver bullet for debt problems. It's not a solution to the excessive consumption habits that cause debt in the beginning. It's also not the solution if you're and have no hope of paying it off even with reduced monthly payments.
If the debt you're carrying is small -- you could pay it off within six months to a year at your current pace -- and you'd save only a negligible amount in the process of consolidating, you shouldn't be concerned.
Do-it-yourself debt repayment alternative, like the . You can utilize a tool to experiment with different strategies.
If the total of your debts is more than half of your earnings, and the above calculator reveals that debt consolidation is not the best choice for you, then you're better off treading in the water.
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About the writer: Amrita Jayakumar is a former writer at NerdWallet. She has previously worked for The Washington Post and the Miami Herald.
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