Should I Consolidate My Debt? Costs, Pros and How To Decide

You should consider debt consolidation if it helps lower your interest rate, reduce the number of payments you manage or speed up your path to becoming debt-free.

Here's how to determine whether you're a good candidate and which debt consolidation options may fit your needs.

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Key Takeaways

• Consolidation makes sense only when the math clearly works in your favor. It helps most when the new annual percentage rate (APR) is meaningfully lower than your current rates and the fees don't erase your interest savings.

• Asking "should I consolidate my debt" starts with your credit and your budget. The best balance-transfer and loan rates generally go to scores of 670 or higher, and you need steady income for a fixed monthly payment.

• The three main paths fit very different borrowers. Balance-transfer cards run 0% for about 12 to 21 months, consolidation loans typically carry 1% to 8% origination fees, and debt management plans (DMPs) suit people who can't qualify for either.

• Consolidation reorganizes debt but never erases it. You still owe the full balance, and you'll likely rebuild it if you don't address the spending that created the debt.

• Your credit may dip first, then recover with steady payments. A hard inquiry can shave a few points short term, but on-time payments and lower utilization can help over time.

• Doing it yourself can win when you're one to two years from payoff. The debt snowball and debt avalanche methods avoid fees and may beat consolidation when savings would be slim.

Summary generated by AI, verified by MoneyLion editors

What Is Debt Consolidation?

Debt consolidation is when you pay off multiple debts by rolling them into a single payment often at a lower interest rate. 

• Types of debt: Credit card debt, medical bills, personal line of credit and some payday loans

• How it works: When you're approved for the loan, the lender either cuts you a check so you can pay your creditors directly, or your lender distributes the funds to the creditors to wipe out your existing balances. 

• Who it is meant for: Individuals who have fair to excellent credit and have manageable debt-to-income (DTI) ratios. It's also a good fit for those who are seeking a lower APR on multiple credit card balances. 

With debt consolidation, you don’t eliminate debt, but you reorganize it into a single monthly payment with a lower interest rate. You still owe the same debt. Debt elimination occurs when you completely pay off the balance. 

When Does Debt Consolidation Make Sense?

Debt consolidation works when the math is in your favor. That usually means replacing multiple payments with one payment at a lower APR. Here are some qualifications to keep in mind: 

• Your credit is good enough to get a lower APR.

• You have enough income to maintain a fixed payment every month.

• The new interest rate is substantially lower than your original APRs. 

• Your total debt can be paid off within the loan period or promo period.

On the flip side, debt consolidation is probably not worth it if: 

• Your rate difference is marginal and won’t necessarily lower your payment substantially.

• The fees wipe out interest savings.

• You haven’t addressed your spending habits and will run up balances again.

• The debt load is too high to keep sustainable monthly payments.

Am I a Good Candidate for Debt Consolidation?

Ask yourself the following questions to determine whether debt consolidation is right for you:

• Will I address my spending habits and not run up my balances?

• Will my interest rate be lower?

• Is the monthly payment manageable with my other expenses?

How To Consolidate Debt: Your Options at a Glance

There are several ways to consolidate debt, and each one works best for a different borrower. Use this table to compare costs, credit requirements and payoff timelines.

Balance Transfer Credit Card

A balance transfer credit card lets you move existing credit card balances to a new card with a 0% introductory APR. This can help you pay down debt without interest for a limited period, typically 12 to 21 months.

Key Features

• Introductory 0% APR period usually lasts 12 to 21 months.

• Once the promotional period ends, the card's regular APR applies to any remaining balance.

• Most balance transfer cards require good to excellent credit, typically a score of 670 or higher.

Best For

• Borrowers with good to excellent credit who can repay balances during the promotional period.

Debt Consolidation Loan

A debt consolidation loan combines multiple debts into a single loan with one monthly payment at a lower interest rate.

Key Features

• You typically have a fixed APR ranging from 7% to 36%. 

• Repayment terms are usually two to seven years. 

• Many lenders charge an origination fee of 1% to 8%.

• For example, if you borrow $15,000 with a 5% origination fee, you'll receive $14,250 but still owe the full $15,000.

• The best rates will go to borrowers with credit scores of 670 or higher. 

• Borrowers with lower credit scores may still qualify through a credit union, secured loan or co-signed loan.

Best For

• Borrowers with good credit who want to combine multiple high-interest debts into one predictable monthly payment.

DMP

A DMP is a repayment program administered by a nonprofit counseling agency. You make one payment to the agency at a lower rate, and those funds are distributed to your creditors. 

Key Features

• A certified credit counselor works with your creditors to try to reduce interest rates and waive certain fees.

• Your debt remains with your original creditor, and you don’t take out a new loan. 

• Monthly administrative fees may apply.

Best For

• Borrowers with fair to poor credit who may not qualify for a debt consolidation loan or balance transfer credit card.

When Paying Down Debt Yourself May Make More Sense

Debt consolidation isn't always the right move. In certain circumstances, it may be best to consider the debt snowball and debt avalanche methods.

Debt Snowball

• Focuses on paying off the smallest balance first while making minimum payments on all other debts.

• Designed to create momentum through quick wins

• Best for: Those who need motivation and have struggled to pay off debt in the past

Debt Avalanche

• Focuses on paying off the highest-interest debt first while making minimum payments on all other balances.

• Designed to minimize interest costs over time

• Best for: Those who want to pay the least amount of interest possible

Consider These Methods If:

• You're one to two years from becoming debt-free.

• A debt consolidation loan would only lower your interest rate slightly.

• Origination fees or transfer fees would offset most of the potential savings.

Pros and Cons of Debt Consolidation

Before consolidating your debt, it's important to understand both the advantages and the risks. Here's how they compare.

How Does Debt Consolidation Affect Your Credit?

In the short term, your credit score may take a dip because of the hard inquiry. However, in the long term, your credit score may improve if you make consistent payments. Here’s how each credit factor is impacted: 

Comparing Your Options: A Real-Numbers Example

Imagine you have $10,000 in debt with a current APR of 22%. Here’s how payment will work with three different strategies: minimum payments only, personal loan and balance transfer card. 

How To Consolidate Debt: Step-by-Step

Ready to move forward? Here's a step-by-step guide to consolidating your debt.

1. Pull your credit report. Review for errors and dispute any inaccuracies.

2. Determine which balances you want to consolidate and gather the balance, interest rate, minimum payment and creditor for each account. 

3. Find out your current average APR.

4. Decide which consolidation method — debt consolidation, balance transfer card or a DMP — makes sense for you.

5. Prequalify with different lenders to find the best overall rate.

6. Compare the total amount — with APRs and fees — before committing to a lender.

7. Apply and get approval from the lender of your choice.

8. Once you receive funds, pay off the existing balances. 

9. Set up autopay for the account so you never miss a payment.

10. Keep the accounts you've paid off open — and keep the new account's balance at zero.

FAQs

Does debt consolidation hurt your credit score?

In the short term, there’s a possibility that it will hurt your credit score since there’s a hard inquiry on your credit. Also, your account age may lower your credit age. However, in the long term, you may improve your credit score since you’ll lower your utilization by paying off balances. 

Can I consolidate debt with bad credit?

You can consolidate debt if you have bad credit, but your options will be limited. You can opt to do one of the following: a secured loan, a credit union loan or a DMP.

What's the difference between debt consolidation and debt settlement?

You pay everything you owe in one payment with debt consolidation. A debt settlement is an agreement to pay a lesser amount than you owe to your creditors. Debt settlement is likely to hurt your credit score and it may show up on your credit report for up to seven years.

How long does debt consolidation take?

For a personal loan, it takes weeks to days to fund, and repayment may take up to five years. For balance transfers, the transfer is immediate, but the promo period may end within 12 to 21 months. 

Is a DMP the same as debt consolidation?

A DMP is run by a nonprofit counseling agency. You pay one monthly payment, and those funds are distributed to the creditors. 

Should I consolidate or just pay off debt on my own?

If you can realistically stay disciplined and pay off your debt in one or two years, then you can make payments on your own. However, if multiple monthly payments and interest are unmanageable, you may want to opt for debt consolidation.

Key Terms

• Debt consolidation: Combining multiple debts into one payment, ideally at a lower interest rate. It simplifies repayment but does not reduce the total amount you owe.

• Balance transfer card: A credit card that lets you move existing balances to a new card with a 0% intro APR, usually for about 12 to 21 months before the regular rate applies. A transfer fee of roughly 3% to 5% typically applies.

• Origination fee: An upfront fee some lenders deduct from a loan, often 1% to 8% of the amount borrowed, so you receive less than the face value while still owing the full balance.

• DMP: A repayment program run by a nonprofit credit counseling agency where you make one monthly payment and the agency pays your creditors, often at reduced rates. It usually carries a small monthly fee and takes several years.

• Debt settlement: An arrangement to pay creditors less than the full balance owed. It's different from consolidation and can seriously damage your credit, and forgiven debt may be taxable.

• Hard inquiry: A lender's review of your credit when you apply for new credit. It can lower your FICO score by a few points temporarily, while checking your own report is a soft inquiry that doesn't affect your score.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau. 2023. "What do I need to know about consolidating my credit card debt?"

• myFICO. "Does Checking Your Credit Score Lower it?"

• Consumer Financial Protection Bureau. 2024. "What is the difference between credit counseling and debt settlement, debt consolidation, or credit repair?"

• Federal Trade Commission. "How To Get Out of Debt."

• Consumer Financial Protection Bureau. 2023. "What do I need to know about consolidating my credit card debt?"

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