What Is Debt Consolidation, and Should I Consolidate?

Debt consolidation rolls multiple debts into a single payment. It can work if your debt isn't excessive and you have good credit and a plan to keep debt in check.

Amrita JayakumarJuly 16, 2020

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Debt consolidation rolls high-interest debts, such as credit card bills, into a single payment. Debt consolidation can be worth it if you get a lower interest rate so you can reduce your total debt and reorganize it so you 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.

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How to consolidate your debt

There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill. However, you'll likely need good credit to qualify:

Two additional ways to consolidate debt are taking out a home equity loan or 401(k) loan. 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 debt-to-income ratio.

Debt consolidation calculator

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

When debt consolidation is a smart move

Success with a consolidation strategy requires the following:

  • Your total debt excluding mortgage doesn't exceed 40% of your gross income

  • Your credit is good enough to qualify for a 0% credit card or low-interest debt consolidation loan

  • Your cash flow consistently covers payments toward your debt

  • You have a plan to prevent running up debt again

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

Consolidate your debt if you can get a loan at better terms and/or it will help you make payments on time. Just make sure this consolidation is part of a larger plan to get out of debt and you don’t run up new balances on the cards you’ve consolidated. Read about how to tackle credit card debt.

A personal loan allows you to pay off your creditors yourself, or you can use a lender that sends money straight to your creditors. Read about the steps required to get a personal loan.

Debt consolidation can help your credit if you make on-time payments or consolidating shrinks your credit card balances. Your credit may be hurt if you run up credit card balances again, close most or all of your remaining cards, or miss a payment on your debt consolidation loan. Learn more about how debt consolidation affects your credit score.

When debt consolidation isn't worth it

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 overwhelmed by debt 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 debt snowball or debt avalanche.

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 seeking debt relief than treading water.

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