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

Debt consolidation makes sense if your interest rate can be lowered, you can make one payment and you’re committed to not taking on additional debt. You’ll need to evaluate two decision points:

• Will the debt consolidation actually save you money in the long term?

• Are you ready to address the underlying reason why you’re racking up debt?

Consolidation can help you with forward progress, but only if you address why you’re in debt in the first place.

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When could extra loan payments save you more on interest?

In the final year, when balances are lowestEarly on, when most of each payment is interestMidway through the loan termAnytime — it makes no difference

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Take a look at this guide to determine if debt consolidation is a good option for you.

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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 600 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

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: 

Consolidation Makes Sense If:

• Your credit is good enough to qualify and 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.

Consolidation Doesn’t Make Sense 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, which may be one of the signs you need debt relief.

Should You Consolidate?

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

• Will the new interest rate and fees save me money overall?

• Can I comfortably afford the monthly payment?

• Am I ready to address the habits or circumstances that caused the debt?

• Can I commit to the repayment timeline without running up new balances?

Debt Consolidation Options at a Glance

There are several ways to consolidate debt, and each one works best for a different situation. Balance transfer cards can be ideal for short-term repayment, debt consolidation loans offer predictable monthly payments over a longer period and DMPs may help borrowers who don't qualify for traditional financing.

Use the table below to compare costs, credit requirements and payoff timelines. 

Balance Transfer Credit Card

A balance transfer credit card lets you move existing credit card debt 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.

Debt Management Plan

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.

Good To Know

Medical bills can often be included in a debt consolidation loan or DMP, provided they're unsecured debts. Whether they're eligible depends on the lender or nonprofit credit counseling agency, so verify which debts can be enrolled before applying.

Comparing Your Options: 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.  

Alternatives to Consolidation

Sometimes debt consolidation isn’t the answer. You may need to consider alternatives.

Consider Debt Snowball or Debt Avalanche 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. 

Debt Snowball

• 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 

• 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 

What About Bankruptcy?

Bankruptcy is a last resort option. If you file a Chapter 7 or Chapter 13 bankruptcy, this will be noted on your credit report for seven to 10 years. This is an option for those who have overwhelming debt and poor credit.  

Is Debt Settlement a Good Idea? 

Debt settlement is an agreement to pay less than what you owe. It can negatively impact your credit and may have long-term consequences if you want to borrow in the future. 

Debt settlement may be worth considering if you're struggling to repay your debts and want to avoid bankruptcy. However, it comes with significant trade-offs, including credit damage, potential fees and no guarantee that your creditors will agree to settle.

If you can afford to repay your debt, debt consolidation may be a less damaging option because it focuses on reorganizing what you owe rather than settling for less than the full balance.

How Consolidation Affects Your Credit

In the short term, it may hurt your credit score 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:  

How To Consolidate: Step-by-Step Guide

Ready to move forward? Here's a quick 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. 

Your Next Steps 

To determine how you should proceed, consider the following to decide whether you should consolidate your debt:   

• List all your debts including balances, minimum payments and interest rates. Listing this information will allow you to compare whether or not debt consolidation will help.  

• If you decide that debt consolidation is a good fit, prequalify with lenders to determine what rate you’ll receive.  

• Review and compare the rate with prequalification to see if the monthly payment is lower.  

• Be prepared to stay on track by not taking on new debt.  

FAQs

Does debt consolidation hurt my credit?

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. 

What credit score do I need?

The minimum credit score depends on the consolidation method. Many personal loan lenders look for scores around 600 or higher, while balance transfer cards often require good to excellent credit of about 670 or above. DMPs don't have a minimum credit score requirement because they're offered through nonprofit credit counseling agencies.

How is consolidation different from 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.

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.

Is a balance transfer card or personal loan better for consolidation?

It depends on your repayment timeline and the type of debt you're consolidating. A balance transfer card may save the most money if you qualify for an introductory APR and can repay the balance before that period ends. A debt consolidation loan may be the better choice if you want fixed monthly payments or need to consolidate debts beyond credit card balances.

How much can I borrow to consolidate debt?

The amount you can borrow depends on the lender, your credit profile and the consolidation method. Personal loans may range from around $1,000 to $100,000, while balance transfer cards are limited by your approved credit limit. DMPs don't involve borrowing money, so there isn't a loan amount limit.

Can I consolidate with bad credit?

You can still consolidate with bad credit, but it may be more expensive since you’ll have to pay a higher interest rate. Consolidation is only helpful if you can lower your interest rate.

How long until the debt is paid off?

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

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?"

Photo credit: Emir Memedovski / iStock