For most people, taking on debt is a fact of life. It’s often part of buying a car or home or getting an education. Using debt strategically is key, and that includes your repayment strategy. One commonly used repayment strategy is debt consolidation—but it’s an approach that should be taken carefully, as it’s not right for everyone.
Americans owe an average of $105,056 in debt.Disclosure 1 That includes all different types of debt, like mortgages, auto loans, credit cards, and student loans. And if you’re managing multiple debts from multiple lenders, it can be harder to come up with a clear repayment plan. Consolidating some of your debt can be a helpful way repay your loans in one monthly payment, and it may even save you money in certain cases.
Debt consolidation means combining a series of smaller debts into one larger loan with one monthly payment. Ideally, the consolidation loan also comes with a lower interest rate compared to your existing debt.
With so many decisions to be made in our daily lives—including which debt to pay off first—consolidating your debt may provide a simpler way to repay multiple loans and make it easier to see your full financial picture.
Using a consolidation loan to shift from three or four monthly payments to just one can bring potential benefits. It may help you reduce your debt stress by:
While consolidating debt can be a good move in some situations, it isn’t right for everyone. If you’re making your payments on time and are on track to pay off your debt within the next year or so, other payoff strategies like the “snowball” or “avalanche” approaches may be a better fit for you.
If your debt is less than 40% of your gross annual income and you can qualify for a low-interest debt consolidation loan or a balance transfer that offers 0% interest for a certain number of months, then consolidation could provide some benefits.
For instance, if you have several credit cards with interest rates in the 18% to 28% range, but you make regular on-time payments and have a good credit score, you may be able to qualify for a debt consolidation loan with a lower interest rate.
On the other end of the spectrum, if your total debt is more than half of your annual income, consolidation may not be the best option for you. Consolidating too much debt could lead to a large monthly payment that leaves you with less flexibility than your current situation.
Ultimately, what’s best for you depends on the type of debt you’re carrying and your unique circumstances. To help you decide, check out these potential pros and cons of debt consolidation.
| Potential pros | Potential cons |
|---|---|
| Could help you pay less in interest | Could come with fees |
| One monthly payment instead of multiple | Initial credit inquiry and new account could temporarily lower credit score |
| Could lower minimum monthly payment obligations | Could take longer to get out of debt depending on loan terms and payment strategy |
Debt consolidation can both negatively and positively impact your credit score, depending on your situation.
First, consider the negatives: If you open a new account to consolidate debt, the new card or loan will lower the average age of all your accounts, which may lower your score. If you transfer your debt to a credit card, you could end up using a higher percentage of your credit limit, which would negatively affect your credit utilization ratio. And finally, when you apply for new credit—a credit card or loan—the lender will likely pull a hard inquiry on your credit report, which can temporarily lower your score.
If you’re planning to take out a loan to make a big purchase in the near future (like buying a home or car), it could be better to hold off on consolidating your existing debt until after that purchase.
And now for the positives: If you transfer your debt to a credit card with a higher credit limit, that can lower your overall utilization rate, which may help improve your credit score. Responsibly using your credit is critical for improving your score. That means making at least your monthly minimum payment on time each month. If you can pay more than your monthly minimum from time to time, it may help improve your score faster.
Read more: Your credit score, explained
Credit card debt is one of the most common forms of debt that people choose to consolidate. However, other forms of unsecured debt such as medical debt, personal loans, and payday loans are also eligible for consolidation.
Student loan debt is also often eligible for consolidation, though it may require a specialized program to do so. Consolidating federal student loans may also void certain benefits, like forgiveness options. Before consolidating, be sure to review the terms of your existing loans to see if it could result in penalties or cause you to lose potential benefits.
When researching your debt consolidation loan options, you may come across some debt relief companies that seem too good to be true. It’s usually because they are. Watch out for these common signs of a debt consolidation scam.Disclosure 2
If you have a high debt load and are unsure about what to do, organizations like Operation HOPE may be able to help.
If you decide to transfer a balance to another credit card, you’ll want to look for a card from a reputable financial institution that offers a low promotional interest rate on balance transfers. Typically, this offer is only good for a limited time, so it can be a great option if you know you can pay off the balance you’re transferring before the promotion expires. Keep an eye out for any transfer fees that could be added to your new balance.
If you don’t already have a credit card with an existing balance transfer offer or promotion, you’ll need to fill out a new credit card application and agree to a credit check. After approval, you’ll likely be charged a balance transfer fee, which can be a set amount or a percentage of the balance you transfer. Before you apply for a new card, weigh your options and compare rates, costs, and fees to ensure you're comfortable.
If you choose to consolidate using a personal loan or home equity loan, you’ll also want to research options from reputable banks and credit unions, taking care to compare interest rates and fees. Loans often come with upfront costs like application and origination fees. You’ll fill out an application, go through a credit check, and may need to supply bank statements, pay stubs, and tax returns. If it’s a home equity loan, most lenders will also require an appraisal. The lender should be able to work with you and answer any questions you have as you go through the process.
Consolidating debt may feel like a chance to reset your finances, but it’s important to remember that, while debt consolidation offers short-term benefits, it may not always be your best long-term solution. Before applying for a debt consolidation loan, take time to review your balances, interest rates, and credit score—then run the math and consult with an expert to see if you’re saving in the long run versus prolonging your debt payoff journey.
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