What Is Debt Consolidation, and Should I Consolidate?

Debt consolidation rolls multiple debts into a single payment. It can be a good idea if you qualify for a low enough interest rate.
Amrita JayakumarFeb 10, 2021

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Debt consolidation rolls multiple debts, typically high-interest debt such as credit card bills, into a single payment. Debt consolidation might be a good idea for you if you can get a lower interest rate. That will help you reduce your total debt and reorganize it so you can pay it off faster.

If you’re dealing with a manageable amount of debt and just want to reorganize multiple bills with different interest rates, payments and due dates, debt consolidation is a sound approach you can tackle on your own.

Key takeaways:

There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill.

Two additional ways to consolidate debt are taking out a or . However, these two options involve risk — to your home or your retirement. In any case, the best option for you depends on your credit score and profile, as well as your .

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Use the calculator below to see whether or not it makes sense for you to consolidate.

Success with a consolidation strategy requires the following:

Here’s a scenario when consolidation makes sense: Say you have four credit cards with interest rates ranging from 18.99% to 24.99%. You always make your payments on time, so your credit is good. You might qualify for an unsecured debt consolidation loan at 7% — a significantly lower interest rate.

For many people, consolidation reveals a light at the end of the tunnel. If you take a loan with a three-year term, you know it will be paid off in three years — assuming you make your payments on time and manage your spending. Conversely, making minimum payments on credit cards could mean months or years before they’re paid off, all while accruing more interest than the initial principal.

Readers also ask

Consolidation isn’t a silver bullet for debt problems. It doesn’t address excessive spending habits that create debt in the first place. It’s also not the solution if you’re and have no hope of paying it off even with reduced payments.

If your debt load is small — you can pay it off within six months to a year at your current pace — and you’d save only a negligible amount by consolidating, don’t bother.

Try a do-it-yourself debt payoff method instead, such as the or .

If the total of your debts is more than half your income, and the calculator above reveals that debt consolidation is not your best option, you’re better off than treading water.

» MORE:  Sign up with NerdWallet to see your debt breakdown and upcoming payments all in one place.

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