Seven Great Reasons Why You Should Consolidate Debt

Are you struggling to find enough cash each month to make the minimum payments on all your credit card bills?

Debt consolidation may be the solution you need. Here are seven reasons why you should consider it.

Key points

  • Debt consolidation rolls your debts into one new loan with one monthly payment. If done correctly, it will ease your budget crunch
  • The best reason to consolidate debts is to roll everything into a single monthly payment
  • If you qualify for a significantly lower interest rate, that’s another sign that it’s time to consider consolidating your debts
  • Debt consolidation will help you pay off your debts
  • You’ll save money each month on interest
  • Fewer payments each month will help you put more money toward other expenses so you don’t have to take on new debt

Seven times you should consolidate debt

There are plenty of reasons to consider debt consolidation. Here are the top seven:

1. To ease your monthly budget crunch

The first reason is to free up extra monthly money for daily living expenses. If the bulk of your monthly income is devoted to making minimum monthly payments on credit card accounts or repaying payday loans, it isn’t realistic to keep increasing credit card debt. The high interest rates will only worsen your financial situation.

When you roll all your unsecured debts into one new loan, you’ll have more money to cover your day-to-day expenses and can develop a realistic budget.

Pro tip: When you set up your budget to see the debt consolidation loan you can afford, route some money each month directly into a bank account to be earmarked for emergencies. 

READ MORE: Types of debt to consolidate

2. The interest rates you pay are too high

Debt consolidation only makes sense if you’re rolling your debts into a new loan with a lower interest rate.

Pro tip: If you only qualify for a higher interest rate than what you currently pay, debt consolidation will not be a good option for you.

There are two main ways to approach debt consolidation:

If you have good credit, you may be able to qualify for a balance transfer credit card with an introductory 0% APR rate. These offer borrowers a predetermined introductory period (usually 12 to 18 months) where your credit card balance accrues no interest. It allows you to make some serious progress toward paying down your debt.

READ MORE: Personal loans vs. balance transfer credit cards

Pro tip: Nothing in life is free, however. You’ll have to pay a balance transfer fee ranging from 3% to 5% of the total amount transferred onto the new credit card.

If your creditworthiness isn’t impressive enough to qualify you for a balance transfer card, a debt consolidation loan will be your next best option. These are usually installment loans with a fixed rate and set repayment timeframe, so you know exactly how much you’ll need to pay each month.

Before you start any loan application process, be sure to total up the full amount of debt you have. Weigh loan offers carefully, and make sure you know the total loan amount you need. Be sure to factor in any origination fees. If you don’t borrow enough money to pay off all of your old debts, you could end up in a worse financial situation.

READ MORE: How to qualify for a debt consolidation loan

3. You want to pay off your credit card debt faster

If you continue just to keep paying the minimum toward your existing debt each month, it will take several years for you to be debt-free, and that’s only if you stop using those credit cards completely.

Plus, you’ll pay several thousand dollars in interest over those years.

Rolling your debts into a single debt consolidation loan will get you out of debt for less money.

READ MORE: Does debt consolidation close credit cards?

4. You need to simplify your debt payments

Rolling your current debts into one larger loan will leave you with one lower monthly payment. A longer repayment term will help you find a payment you can afford.

The due date is easier to remember, lowering your chance of racking up late fees for missed payments that will hurt your credit score.

Pro tip: As you pay off your debt, your credit score will steadily start to increase. Eventually, you may be able to refinance your debt consolidation loan by using a balance transfer credit card offer with no interest.

5. You’d like a longer loan term

A loan with a longer repayment term will probably cost you more money in interest over the years, but it will lower your monthly payment, which will help you be able to devote more of your monthly income to living expenses.

Pro tip: This could save you money if it saves you from racking up new high-interest debt on your credit cards.

6. You need a fixed schedule and payment amount 

It’s easier to stick to your budget because you’ll know exactly how much money you need to set aside each month for your debt payment and when that payment will be due. 

One of the primary benefits of having a single payment is that you can see your progress and know exactly when you’ll finally be debt-free. 

7. You want to improve your credit score

Credit scores are important. They determine the rates you’ll pay to borrow money and whether you can get a cell phone, rent an apartment or even be eligible for certain jobs. 

Taking on new debt will initially cause your credit score to fall because the lender will run what’s known as a hard credit check when you submit your loan application. This should only decrease your score by a few points, and the damage should only last a few months.

Consolidating debt will ultimately help your credit history.

Here’s why:

  • Establish a record of on-time payments: This is worth 35% of your credit score.
  • Improved credit utilization ratios: This is another 30% of your score

The higher your credit score, the better your chance of qualifying for lower interest rates in the future.

Pro tip: You can get free credit reports from all three credit bureaus once a year at

READ MORE: How debt consolidation affects your credit score

When does debt consolidation work?

If you’re making multiple minimum payments each month on unsecured debt with high annual percentage rates (like credit card bills and personal loans), rolling everything together into one loan will save you money each month and over the life of your new loan. 

Check out this example of how much you can save by consolidating $10,000 in debts.

Here’s a comparison of how much debt consolidation can save by consolidating $10,000 in debt.

Current loanConsolidation loan repaid over two yearsConsolidation loan repaid over five yearsBalance transfer credit card
Loan amount$10,000$10.000$10,000$10,000
Interest rate 19.99%7.5%7.5%0% for 21 months (3% balance transfer fee)
Repayment termTwo yearsTwo yearsFive years20 months
Monthly payment$508 per month$450 per month$200 per month$500 per month
Total interest paid$2,203$800$2,203$300 in fees
Total repaid$12,203$10,800$12,203$10,300
Total savings per month0$58 per month$308 per month$8 per month

So, if you opt for a balance transfer credit card, you’ll only be shaving about $8 per month off your minimum monthly payments, but you will be debt-free four months faster.

Simply consolidating your debt into a lower-interest loan and repaying it over the same timeframe will shave about $58 off each payment.

If you consolidate to a five-year loan term, you’ll pay the same amount in interest, but your payment will be $308 lower per month. So even though you’re extending your debt payments for an extra three years, the lower interest rate means you won’t pay any extra money to get out of debt. 

READ MORE: Debt consolidation if you’re between jobs

Types of debt to consolidate

Most all unsecured debt can be consolidated. This includes:

  • Credit cards
  • Payday loans
  • Personal loans
  • Installment loans
  • Some student loans
  • Medical bills

Pro tip: Unsecured loans are any loans not secured by an asset like a car or a home.

READ MORE: What is debt consolidation?

Other debt consolidation loan options

If you don’t qualify for a debt consolidation loan or personal loan with a lower interest rate, you still may have a few other loan options.

  • Home equity loan 
  • Home equity line of credit
  • 401(k) loan
  • Peer-to-peer lending
  • Borrow from friends and family

READ MORE: Does divorce affect debt consolidation?

When will debt consolidation not work?

In a few instances, debt consolidation will not be the right choice for you. These include:

  • If your credit score is low
  • If you have a lot of secured debt (like a mortgage or car loan)
  • You have a significant amount of unsecured debt
  • You only qualify for loans with higher interest rates
  • You don’t have the discipline to stop using credit cards
  • You can’t afford the loan payment on the debt consolidation loan
  • The interest rate on the new loan is so high that the period of time it would take you to pay off your debt consolidation loan is unrealistically long
  • Your debt is primarily due to federal student loans, tax debt, child support or alimony

In these cases, it will be better to set up a repayment strategy (like debt snowball) and work on improving your credit score. 

Deb consolidation will be much easier once your credit score is high enough.

READ MORE: Debt consolidation pros and cons

Pro tip: Debt consolidation will not work if you consolidate your debt into a new loan but then run up your credit cards again. If you don’t have the discipline to pack away your credit cards, you’ll be better off talking to a credit counselor or considering debt settlement. 

READ MORE: Debt consolidation vs. debt settlement

Should you consolidate debt? Check out this video to learn more about when it’s the right move for you:

Other ways to become debt-free

The bottom line

Most Americans desperately need debt relief. Debt consolidation can be an easy solution. But keep your expectations realistic. If your credit score is poor, you won’t have the same number of options. In those cases, you may be better off consolidating by using a less traditional debt consolidation loan, like a home equity loan or 401(k) loan.

If these aren’t an option, start using a repayment strategy like debt snowball until your credit score is high enough to qualify for a better loan. 


How can I find a balance transfer credit card?

Most top credit card issuers offer cards with an introductory balance transfer offer. This includes Chase, Citi, Capital One, American Express and Discover. Learn more about how these cards work.

What is debt settlement and is it better than debt consolidation?

Debt settlement involves contacting your lenders and/or creditors and offering them a payment that’s less than the total you owe, usually in exchange for your debt being written off as paid or settled. It can be a cheaper way of getting out of debt than debt consolidation, even after paying fees to a debt settlement company, because you’re repaying less than the full amount you owe. However, you’ll usually need at least $7,500 in unsecured debt before you’re eligible, and your credit score will worsen during the settlement process. Your credit score should rebound quickly once settlements have been negotiated and paid. 
Debt consolidation will be the better option for anyone who has excellent credit (and therefore will qualify for the best loans), who has less than $7,500 in unsecured debt or who wants to avoid serious credit score damage because they expect to make major purchases – like a car – within the next year.

How much will debt consolidation affect credit scores?

Any new loan or credit card will slightly reduce your credit score for a few months after your application. That’s because the lender runs what’s known as a hard credit inquiry during the application process. Your credit score will recover quickly as long as you make the payments on your new loan on time.
In addition, your credit score should increase over the long term due to lower credit utilization. As you transfer balances from credit cards to a new loan, your credit utilization percentage will decrease, which will bump your credit score. 

Can debt still be consolidated with a high debt-to-income ratio?

Yes. In that case, you likely won’t be able to qualify for an unsecured personal loan. However, there are still some borrowing options. They include:
–Borrow with a co-signer
–Apply for a secured loan
–Use a credit card balance transfer
–Try a home equity loan or HELOC
Learn how to calculate your debt-to-income ratio

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