When you’re working to pay off a large amount of debt, it can often feel difficult to get ahead. You might make multiple monthly payments to different lenders or credit card companies. And with high interest rates on these types of debts, it’s easy to feel that you aren’t making progress.
That’s where debt consolidation comes in. When you consolidate your debt, you can replace multiple debts and monthly payments with just one. Additionally, you might qualify for a lower interest rate, helping you pay off your debt more quickly and save on interest.
Debt consolidation is the process of combining several existing debts into a single debt. Many borrowers use it for credit cards, which have high interest rates and compounding interest, both of which make it difficult to reduce your principal amount. However, you can use debt consolidation for nearly any type of debt.
There are several ways to consolidate debt. A personal loan is one of the most popular options. Others include a home equity loan, a home equity line of credit (HELOC), a balance transfer credit card, or a consolidation loan or refinancing for education debt.
Related: Learn more about getting a personal loan
Debt consolidation is generally a smart strategy when your current debt has become unaffordable or unmanageable. Here are some situations where debt consolidation might be a good idea:
Debt consolidation makes sense for plenty of borrowers, but it’s not always the right move. For example, debt consolidation probably isn’t a good fit if your debt is smaller and you expect to pay it off in just a few months. In that case, it’s better to simply focus on your monthly payments rather than consolidating.
Debt consolidation likely isn’t the right fit if your credit score is on the lower end. Unfortunately, poor credit or thin credit history can hold you back from qualifying for new loans and credit cards. And even if you do qualify, you might find the interest rate is unaffordable — and possibly higher than your existing rate.
What’s more, you shouldn’t use debt consolidation if you aren’t committed to paying off your debt. Moving your credit card balance to a new credit card or a personal loan can be a good start, but it won’t help if you just end up accumulating new debt.
Additionally, some people use home equity loans and HELOCs for debt consolidation. And because these loans are secured by your home, you could end up losing your home if you fail to make your monthly payments. It’s better to have a credit card you can’t pay than a home equity loan you can’t pay.
Consider the following options if you’re thinking about consolidating your debt:
Related: Learn more about getting a personal loan
Debt consolidation can be a great option to help you manage debt, but it can also be complicated. To help you decide if it’s right for you, we answer some of the most frequently asked questions about debt consolidation.
The eligibility requirements for debt consolidation depend on how you plan to consolidate your debt. No matter what route you choose, you’ll need to meet your lender’s requirements for minimum credit score and debt-to-income ratio.
Debt settlement is when you settle your debt for less than you owe. Debt consolidation still requires that you pay off the full balance — you simply combine multiple debts to pay them off together.
Yes, debt consolidation can hurt your credit score, at least in the short term. When you apply for debt consolidation, you’ll have a hard inquiry on your credit report, which could ding your score. You could also lose points by opening a new debt account and closing existing accounts. However, your score is likely to bounce back in the long run as long as you continue making your monthly payments on time.