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Debt Consolidation in 250 Words: What to Know

May 26, 2017
Paying Off Debt, Personal Finance
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What is debt consolidation? It’s rolling several debts — like credit cards and medical bills — into a single payment at a lower interest rate. Ideally, this is part of a plan to become debt-free.

When should I consolidate? Debt consolidation is a good idea if you can qualify for a lower interest rate that makes payments more manageable or gets you out of debt faster. It’s not a good idea if you are likely to run up debt again or if the debt is overwhelming.

How can I consolidate? Two common ways are balance transfer credit cards and personal loans. What works best may depend on your credit score. If your credit score is good to excellent, look for a 0% balance transfer credit card (be sure to pay off the balance before the 0% period expires to avoid interest). If your credit is average, find a debt consolidation loan with rates lower than your credit cards.

A poor credit score may disqualify you for a balance transfer card or a personal loan at a rate that would reduce your payments. Keep making on-time payments on current debts; that builds credit, which can help you later.

My debt is overwhelming. What are my options? Schedule a free consultation with a credit counselor to see if a debt management plan could work for you.

If unsecured debts equal 40% or more of your gross annual income or your debts cannot be repaid in five years, bankruptcy may be the best option.

Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @ajbombay.