The Pros and Cons of Debt Consolidation

If you have multiple sources of debt, like high-interest credit cards, medical bills or personal loans, debt consolidation can combine them into one payment.

Getting a debt consolidation loan or using a balance transfer credit card makes the most sense if it lowers the amount of interest you pay. But refinancing debt has pros and cons, and it may not be the right fit for everyone.

Pros of debt consolidation

You could receive a lower rate

The biggest advantage of debt consolidation is paying off your debt at a lower interest rate, which saves money.

For example, if you have $9,000 in total debt with a combined APR of 25% and a combined monthly payment of $500, you’ll pay $2,500 in interest over about two years.

But if you were to take out a debt consolidation loan with a 17% APR and a two-year repayment term, the new monthly payment would drop to $445. You’d also save $820 in interest.

If you qualify for a balance transfer card, you’d pay zero interest during the promotional period, which can last up to 21 months. This eliminates interest costs altogether.

Use our debt consolidation calculator to see how much you could save by consolidating your debt at a lower interest rate.

You could get out of debt faster

By consolidating at a lower rate, you can also use the money you saved on interest to get out of debt faster.

In the example above, your monthly payment would change from $500 to $445. If you don’t need that $55 elsewhere, you could keep making monthly payments of $500.

By applying your savings to your remaining balance, you’ll ultimately shorten the loan’s repayment term. This saves even more money on interest, since you’ll make fewer monthly payments overall.

This strategy has an even bigger payoff with a balance transfer card. Since you won’t be paying any interest during the promotional period, the savings you apply to your balance could be much higher.

You’ll have just one monthly payment

Instead of keeping track of multiple monthly payments and interest rates, consolidating combines the debt into one payment with a fixed interest rate. Your payment won’t change over the life of the loan (or during the promotional period, in the case of a balance transfer card).

But it’s not just about simplifying your repayments. Consolidating can give you a clear and motivating finish line to being debt-free, especially if you don’t have a debt payoff plan in place.

You could build your credit

Applying for a new form of credit, such as a debt consolidation loan or balance transfer credit card, requires a hard credit inquiry. That can temporarily lower your score by a few points.

However, if you make your monthly payments on time and in full, the net effect should be positive, especially if you’re consolidating credit card debt.

Paying off credit card balances lowers how much available credit you’re using, which is one of the biggest factors that determines your credit score.

» MORE: How does debt consolidation affect your credit?

Cons of debt consolidation

You may not qualify for a low rate

Balance transfer cards can be hard to qualify for and typically require good to excellent credit (any score in the mid 600s or higher).

Debt consolidation loans are more accessible, and there are loans tailored for bad-credit applicants. But borrowers with the highest scores usually receive the lowest rates.

Unless the lender can offer you a lower rate than your current debts, debt consolidation may not be worth it. Consider another debt payoff strategy, like the debt avalanche or debt snowball methods.

There may be additional fees

Consolidating debt can come at a cost.

Some debt consolidation loans come with origination fees, which are typically 1% to 10% of the total loan amount and are included in the loan’s annual percentage rate.

Balance transfer cards have balance transfer fees, usually 3% to 5% of the amount you’re transferring to the new card.

If these fees are higher than the amount you’d save by consolidating your debt, consider other debt payoff strategies.

Missed payments could make things worse

If you miss payments toward the new debt, you could end up in a worse position than when you started.

For example, if you fail to pay off your balance transfer card within the zero-interest promotional period, you’ll be stuck paying it at a higher APR — potentially higher than the original debt.

If you fall behind on a consolidation loan, you’ll rack up late fees. Missed payments are also reported to the credit bureaus, which hurts your credit score.

Before consolidating, make sure the new monthly payment fits comfortably in your budget for the entirety of the repayment period.

It doesn’t address root issues with debt

Though consolidation is a helpful tool, it doesn't address the issues that led to debt in the first place.

If you struggle with overspending, consolidation is a risky choice. By taking out a loan to pay off your credit cards, those cards will have a zero balance again. You might be tempted to use them before the new debt is paid off, digging yourself into an even deeper hole.

If you’ve been using credit cards to cover necessities, look for alternatives to borrowing, like local charities that offer assistance with groceries, rent, utilities and transportation.

A credit counselor at a reputable nonprofit can also help you set up a budget and enroll in a debt management plan, rather than tackling the debt on your own.

How to get a balance transfer card or debt consolidation loan

Balance transfer credit cards

If you only have credit card debt, and a good to excellent credit score, consolidating under a 0% balance transfer card saves you the most money.

Many credit card companies offer balance transfer cards. Note, though, that you can't transfer balances between the same issuer. For example, if most of your debt is on a Chase credit card, you can’t move it to a Chase balance transfer card. This can help narrow down your options.

From there, try to pick a card with a long enough promotional period to pay off your debt and a small balance transfer fee to minimize costs.

» COMPARE: NerdWallet’s picks for the best balance transfer cards

Debt consolidation loans

If you have multiple types of debt, or a lower credit score, a debt consolidation loan is likely the best choice.

Credit unions, banks and online lenders offer debt consolidation loans. Online lenders tend to fund the fastest and approve borrowers across the credit spectrum.

NerdWallet recommends pre-qualifying with multiple lenders to see potential rates without affecting your credit score. The best debt consolidation loan is the one with the lowest APR and an affordable monthly payment.

» COMPARE: NerdWallet’s picks for the best debt consolidation loans