How and when to consolidate your debt

A couple goes over their finances.
March 12, 2020 | Michelle Huffman

Is consolidating your debt a good idea? Let’s take a look at this situation.

It’s the first of the month and your car loan payment is due. A week later, your credit card payment is due and two more follow. Then you have to remember to send a payment for a medical bill.

If you’re struggling to keep track of all these payments and getting disheartened seeing how much money you’re paying in interest each month, you may want to consider consolidating your debt. Debt consolidation takes several unsecured loans — credit cards, student loans and personal loans — and combines them into a single debt. That debt can take several forms, such as a new loan, home equity line of credit (HELOC), or a balance transfer on a new, lower-interest credit card, but the result is the same: One debt with one monthly payment.

This single payment alone may be attractive, but what convinces many people to consolidate their debt is the promise of a lower combined monthly payment and/or a lower interest rate. These features can either free up cash flow when you need it or save you money in the long run – or both.

Before jumping into a debt consolidation option, you’ll want to fully understand the terms and the pros and cons of each.

How to consolidate debt

Balance transfer on a credit card

This is a longstanding and popular option for debt consolidation. Here’s how it works: You take the debt racked up on one or several credit cards and transfer the balance(s) to a new credit card — one that typically carries a low or 0% interest rate, at least for a period of time. Typically these are advertised as introductory rates for balance transfers and they have an expiration date. Within a few months — typically 12 to 21 months — the standard interest rate kicks in. This is usually the same interest rate any other credit card carries.

The key to taking advantage of these offers is to plan a manageable monthly payment that will erase the debt before the interest-free period is up. You’ll also want a card that has a low standard rate, just in case you still have a balance when the intro period ends.

Note: Balance transfers also typically carry a cost to complete the transaction, usually 3% to 5% of the total amount transferred. You should calculate the cost of the transfer and deduct it from your anticipated savings to determine if the offer is worthwhile.

Personal loans

Another option is taking out a new personal loan with a financial institution such as a bank, credit union or lender. There are also specialized debt consolidation companies that offer this service, however, your best bet is to work with a trusted credit union or bank to avoid a potential scam.

The terms of the loan will be based on your credit profile, just like any other loan. This means that you may or may not find more favorable terms (lower interest rate or monthly payment) than the loans you already have.

Note: Know your goals before you take out your loan. Do you want to make payments easier or do you want to pay off your debt quicker? If you want to make payments easier, you would extend your term. If you want to save more on interest and pay your debt off quicker, you’d pick a shorter term.


A HELOC works much like a credit card; a lender offers a line of credit up to a certain limit, based on the equity in your home and your credit profile and borrowing history. You can use the offered credit to pay off your existing debt. This is similar to a balance transfer, but in the case of a HELOC, there are no balance transfer fees.

Note: Because a HELOC functions like a credit card, some people may find it tempting to use it like one, adding more debt as more credit becomes available. HELOCs also carry variable interest rates, so your rate  may increase over time.

Considering debt consolidation

If you’re considering debt consolidation, take a look at your total debt load, your interest rates, your personality, your financial goals and the products you select to complete the debt consolidation. Ask yourself the following questions to ensure you’re picking the best debt consolidation method for you.

  • Do I have a plan for paying off this debt?
  • What is my goal in consolidating this debt? To save money? To reduce my monthly payments? To reduce the number of payments I manage each month?
  • Will this particular debt consolidation method meet my goals?
  • Will this method increase my payment schedule?
  • Will this method increase my overall debt?
  • Does the interest rate on this new debt offer significant savings over my current interest rate(s)?
  • Do I fully understand the terms of this new loan or credit card?

When you ultimately make the decision whether to consolidate your debt and which method of debt consolidation to use, look for a financial institution you trust, such as the bank or credit union that holds your checking account, savings account, credit cards or other loans. These companies also have more of a vested interest in ensuring you pay off your loan in a timely manner and remain a long-term customer.

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