How to consolidate your debt and when you should consider it

Debt consolidation is a handy technique to take advantage of lower interest rates. It’s a highly effective way to manage your debt so you can not only pay it off in a timely manner, but also avoid paying more interest. Here’s how to consolidate your debt without hurting your credit score.

How to consolidate your debt

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The goal of debt consolidation is to put all your debts into one monthly bill. You can do this through:

A 0% interest credit card with the ability to transfer balances. This type of credit card will come with an introductory 0% APR for six to 24 months to attract new customers. Through balance transfers, you can move debt to this card and take advantage of a zero-interest period. It requires a high credit score (690 or greater) and a limited timeframe of repayment before interest kicks in, which might be barriers.
A debt consolidation loan with a fixed rate. This loan allows you to pay your high-interest debts with a single, fixed-rate lump sum. The loan itself will have a set rate that lasts until it is paid in full. Rates will vary depending on your credit score, but the barrier to entry is much lower: it is an effective way to consolidate debt with bad credit.
A debt-management plan. Nonprofit credit counseling agencies can negotiate with creditors to lower your interest rates, reduce fees, or extend your payment periods. From here, you pay the agency as a middleman to your creditors. This service applies to personal loans and debts incurred through credit cards. The risk here is spotting a reputable agency that is truly nonprofit and won’t take your money. The US Department of Justice has a list of approved agencies by state.

“Aiming for a lower interest rate is the most important consideration in debt consolidation. Credit cards usually have APRs in the double digits, from 18 to 24% or even more; debt consolidation can bring this down by half, or more.”

Why consolidate debt?

Aiming for a lower interest rate is the most important consideration in debt consolidation. Credit cards usually have APRs in the double digits, from 18 to 24% or even more; debt consolidation can bring this down by half or more.

Consider the timeframe for when to consolidate debt: If you have a stable financial base, then having a loan with a fixed term (such as three or five years) can offer hope for getting over debt. This would be considerably faster and less costly than making minimum payments on credit cards, which can accrue thousands of dollars of additional interest.

During this timeframe, prepare for the unexpected: layoffs, emergency savings, or medical issues could impact your repayment schedule. Debt consolidation works best when your monthly payments are less than 50% of your take-home pay.

Use a debt consolidation calculator

Debt consolidation can affect your credit score: late payments, for-profit debt settlement companies, or borrowing from retirement accounts can negatively impact your credit score, making it harder to negotiate for lower interest rates.

Debt consolidation also doesn’t include student loans, mortgage refinancing, auto loans, and other secured debts. It works only on unsecured loans such as credit cards. To determine whether debt consolidation can work for you, use a debt consolidation calculator and enter your balance, interest rate, and monthly payments. Sometimes debt consolidation isn’t the best answer, such as if you owe smaller amounts and consolidation would have similar rates. For overwhelming amounts, debt relief services are usually the answer, but they also carry their risks.

Managing debt is one of the biggest worries in a household’s financial stability—but with effective budgeting, techniques like the snowball method, and healthy spending habits, you can find the light at the end of the tunnel. See Microsoft 365 for more budgeting, organization, and productivity tips.