How to Consolidate Debt: 9 Steps to Regain Control

Debt consolidation holds out an attractive promise: You can roll up several credit card balances, outstanding loans, and other debts into one, bigger loan with a single, lower monthly payment. Owing a lower amount every month makes it less of a stretch to pay off your restructured debt. Then going forward, having a single loan makes it easier to manage on-time bill payment. Say goodbye to juggling different interest rates, amounts owed, due dates, etc.; say hello to a single monthly payment.

The reality of how to consolidate debt, though, is more complicated. For one thing, you may need to be in pretty good financial shape to be eligible for some options (even if paying your debts is a struggle).¹ For another, restructuring your debt might actually mean higher total costs due to lengthier repayment terms.^2,3 And to really make a difference, any debt restructuring should be accompanied by a fundamental reset of your overall spending.²

Following the nine steps outlined below can help clarify how to consolidate debt—step by step.

You typically need to have an OK credit score (at least 670). Otherwise, banks usually charge higher interest rates, if they agree to lend to you at all.¹

If your debt is small and could be paid off in a year with a few extra payments, some experts say that debt consolidation might not be worthwhile.⁴

Not all loans are good candidates for consolidation. Debt consolidation works mainly for unsecured debt.⁵

It’s not much use to mix in secured debt, such as home mortgages and auto loans, because their interest rates tend to be lower than personal loans.^6,7

And student debt often carries lower interest rates than you could get by consolidating it with other types of debt.^6,8 That said, multiple student loans can be rolled into one. The U.S. Department of Education has an online federal student loan consolidation application and a calculator to show what your monthly bill would be.^9,10

Several rules of thumb apply when analyzing how to consolidate debt.

• Secured vs. Unsecured. You can generally save money on interest charges if you consolidate unsecured debt through a secured loan, such as a “cash-out” mortgage refinancing or a home equity line of credit (HELOC), because they generally have lower interest rates.¹¹
• Short term, lower interest. So, you can also generally save money on interest charges by taking out the shortest-term debt consolidation loan whose monthly payment you can afford.²
• Long term, higher cost. Because you pay interest over a longer period, longer terms can sometimes push total loan costs higher, not lower, than the debt you were facing at the outset.² This gives you a trade-off to consider: Is lowering your monthly expenses by taking out a longer-term debt consolidation loan worth the higher total cost in the long run?

Online calculators are available from lenders to crunch your specific numbers to estimate total costs.¹²

Comparing the alternatives could help determine your final choice. Here are some common debt consolidation options:

• Personal loans. A common choice, with interest rates.⁶
• Leverage your home. You could use your home's equity to get a loan to pay your other bills.^4,5 Another option is a home equity line of credit (HELOC).⁴ In either case, you are literally risking the roof over your head if you don’t make your new payments.
• Transfer credit card balances. If credit card balances are your biggest problem, you could consider a 0% balance transfer card. A balance transfer fee might be required, but some card companies waive that fee to attract business. Card companies may offer a 0% introductory APR for between 9 and 12 months.⁴
• Debt relief service. Debt relief companies help renegotiate your debt for you—but they’re not all above board. The Federal Trade Commission recommends checking with your state attorney general and local consumer protection agency to find a reputable debt relief service.¹³

Ask yourself whether there’s more you can do to adjust your spending and pay off your current bills without a consolidation loan, says the Consumer Financial Protection Bureau (CFPB).² And check with your creditors directly to see if you can negotiate lower interest payments or longer terms.² You might also want to consult a nonprofit counselor on how to consolidate debt, the CFPB says.²

And keep in mind that while debt consolidation can improve your credit score in the long term, the immediate impact might be negative. The potential for a short-term fall includes the simple fact of opening a new account and closing existing accounts as you consolidate debt.¹ Be sure your timing isn’t off, considering possible plans for other major steps such as home buying.

This one is pretty self-explanatory. But when you get this far, you might just want to pause to stare at the new light at the end of the tunnel.

After you've received a debt consolidation loan, it's likely time to begin budgeting your future spending and making a concerted effort to stick to your plan. The CFPB reminds people considering debt consolidation that it may not work without addressing their spending habits.²