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Debt consolidation is when you take a number of different debts and roll them into one repayment. This typically happens when you take a high-interest product like a credit card or multiple credit cards, and refinance it so that you just have one monthly payment. This helps you organize your debt and also lowers your total monthly repayments.

If you only have a small amount of debt and want to combine it or reorganize multiple bills that have different payments, due dates, and interest rates then debt consolidation is something that you can get started on by yourself.

How Do I Consolidate Debt?

There are two main ways to consolidate debt. They both concentrate various streams of debt into a single bill.

  • The first way is to get a 0% interest credit card that doesn’t charge you for a balance transfer. You would take all of your debt and transfer it onto this credit card and you would need to pay off the entire amount in the promotional period so that you don’t get any interest. If you have a credit score of over 690 then you will probably be eligible for one of these cards .
  • The second way is to get a fixed-rate debt consolidation loan where you take the money from your loan to pay off a number of your debts. You can then pay back the loan in installments over a period of time, but this will be for a lower interest rate and be easier to manage. If you have a bad credit rating or a poor credit history (under 690) then you will probably qualify for one of these loans.

Those are the two main ways to consolidate debt, but you can also dip into your 401(k) or take out a home equity loan to repay debt. These two methods are significantly riskier because they could impact your home and your retirement. Depending on your credit score and debt-to-income ratio, you’ll be able to choose the right option for you.

When Is Debt Consolidation A Smart Thing To Do?

When planning out a debt consolidation strategy, you need to think about the following things:

  • How much you’re paying in debt each month, including your rent or mortgage. You never want this figure to exceed 50% of your gross income
  • Is your credit score high enough to qualify for a 0% credit card or low-interest loan
  • Do you have cash flow that consistently covers payments toward your debts?
  • Can you pay off your deck consolidation loan within 5 years?

You need to be able to answer all of these questions before deciding on what to do.

Here’s a simple example of where debt consolidation would make sense for this individual. The profile of the individual is they have five credit cards with interest rates ranging from 15% to 27% and they always make their payments on time. This means that they have a good credit score because you make your monthly payments. They might then qualify for an unsecured debt consolidation loan at 6% – this is much lower than the interest rates on a credit card.

Typically, debt consolidation is a savior because it shows a path towards being debt-free. If you take a loan with a 4-year period you know that after 4 years you’ll be debt-free – assuming you don’t take on any more debt and you make your monthly repayments. If you decide to just pay your monthly minimums on your credit cards, then it could be months or years before they’re paid off – you’ll also be accruing more interest than ever before.


When Is Debt Consolidation A Bad Idea?

Consolidation does not make your debt problems go away in an instant. It doesn’t get rid of the underlying habits that got you here in the first place – spending over your means and spending more than you have. It’s also not a good solution if you are overwhelmed by debt and don’t have a chance of paying it off, even if it’s slightly less each month.

If you don’t have a huge amount of debt and you’re on track to pay it off within 6 months or 12 months at the current repayment schedule, then you probably don’t need to consolidate. This is because you’ll pay this off following your current habits.

If you want to pay off the debt yourself without consolidating, then you should follow the debt avalanche or debt snowball methods. This is where you pay off the debt with the highest interest rate first before going to the second-highest and so on. Just make sure you’re paying off the most toxic debt first.

If you have debts that total more than half of your income, then debt consolidation might be the right thing for you. Or you might want to get debt relief.

FAQs About Debt Consolidation

Should I Consolidate My Credit Card Debt?

If consolidating your debt will get you a significantly lower interest rate than you’re paying right now, then it’s probably a good idea. However – if you’re just doing this so that you can then take out more credit card debt, then this is not the path to being debt-free. Make sure a deck consolidation is part of a wider strategy.

How Do Debt Consolidation Loans Work?

When you take out a debt consolidation loan, you will use this money from the loan to pay off your credit card balances. This means that you then pay one monthly payment instead of many monthly payments at a higher interest rate.

Will A Debt Consolidation Loan Damage My Credit Rating?

When you take out a debt consolidation loan, you will use this money from the loan to pay off your credit card balances. This means that you then pay one monthly payment instead of many monthly payments at a higher interest rate.

Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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