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The Best Ways to Consolidate Debt – Full Guide

There is more than one way to consolidate your debt. What are the best methods to consolidate debt and which one is better for your needs?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor


Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

Before discussing the best ways to consolidate debt, we need to define this.

Imagine you have several loans and debts you need to pay off. This can be a hassle. Keeping up with all of these small loans can really eat at you, but imagine if there was a way you can take out one big loan, and then use that loan to pay off all of the smaller debts you owe. 

The result is paying one bill a week, month, or however long to pay off. Wouldn’t it be kind of better to know once you pay off this big loan, all of the debts you owed are now finished? That you don’t have to worry about the small details of specific loans or take the risk of forgetting about them?

When it Makes Sense to Consolidate?

There are a few different scenarios in which it makes sense to consolidate debt. If you have many different debt repayments that you make each month, it can be a lot easier to handle by consolidating them all into one single loan.

There are also often opportunities to lower the overall rate of interest you are paying on this debt by consolidating them into the same payment. This means that you can often pay off your total debt at a faster rate.

There isn’t one way to just obtain a debt consolidation loan or to pay off all of these debts. In fact, there are numerous amounts of ways you can get them. In addition, you may consider a plan to pay off your debt, such as the debt avalanche or the debt snowball method.

How to Use The Debt Avalanche Method
The debt avalanche method's prioritize the higher interest, (Photo by shisu_ka/Shutterstock)

Does Consolidation Ruin Your Credit?

While you are able to reduce your monthly payments by consolidating debt, it will also sometimes lead to your credit score dipping temporarily. One of the reasons is that you will combine the various loans into a single loan.

Applying for a loan will require the lender to conduct a hard credit check, which will cause your credit score to dip. When you get approved for this new form of credit, there will also be a slight dip in your credit score. However, these are usually only minor dips.

So what are your options? Let’s dive in

1. Balance Transfer / Low Interest Credit Cards

A lot of times we find ourselves owing debts on our credit cards. That’s just how life works sometimes. Something comes up or some crazy accident happens and we need to use our credit cards. If you have multiple ones, though, it can be extremely frustrating to fix and get on the positive.

One way to aid this is by transferring your balance on your credit cards onto one account. A lot of credit card companies actually promote their low-interest rates including 0%  interest rate for the first three to 18 months.

This window of opportunity is available to pay off the complete amount you owe, without adding interest. You could put the amount of all your credit card debts into one. With the company’s “no interest rate” for a set amount of time, you have a window to not pay interest.

This can all be extremely beneficial, especially since you don’t have an interest rate for a while. Just keep in mind when your three to 18 month “no interest rate” is expired.

If you want to do this, you need to find a credit card company that lends the total amount you owe. There are downsides to these companies, though. The con to this is potentially taking a hit on your credit score. Credit scores mean a great deal to us today, as they should.

Be aware: Stacking all your debts on one card could hit your score. Other than that, you will need to meet some requirements. When doing this, you will need a good credit score and a good credit history.

Also, remember that if you go past the window of opportunity for paying no interest, you will be charged interest until the whole amount is paid off. Side note: Transferring these debts to one card might require a balance transfer fee of 2%-5%.

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Sometimes you will be denied a loan even if you have a decent credit score. What can help? A low-interest credit card. Generally, you can be approved for a balance transfer credit card if you have a good credit score.

So if you go with this approach, be cautious like always. You have to really set rules for yourself and make sure you pay the minimum amount monthly.

You don’t want to be paying off loans for years or even decades because you can’t discipline yourself. Finally – you can always try to reduce your credit card interest rate.

Data by the St. Louis Fed on commercial bank interest rates of credit card plans. However, today's rates are higher due to the massive increase in interest rates.

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2. Consolidate With Personal Loans

Taking out a personal loan is an excellent way to reduce your debt to a single payment.

While credit cards are better for debt consolidation, personal loans may offer lower rates in specific circumstances.

The most challenging part is now locating the right loan for you. Every bank is unique, and each loan they provide is unique. As a result, there is a lot to consider when looking for a personal loan, from interest rates to loan terms, flexibility to other fees.

A credit union/bank offers debt consolidation loans to help those who need them. This can help by combining a series of your debts into one, making it more transparent and easier to read. These loans can vary in amount and interest rates.

Be sure to ask questions and take notes when talking to a representative or browsing online to find a debt consolidation loan. These generally have lower interest rates than those you are paying. Make sure to pay attention to details, and especially see how long the payment periods are.

However, if your credit score is too low, it can be challenging to get a personal, especially if you're looking for lower rates than your current rates.

In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, for those with a poor credit rating of less than 560, the rate shoots up to an eye-watering 113%.


3. Use Home Equity Loan To Consolidate

You could have possibly heard this as a “second mortgage”.

Basically, this is taking out a loan from a bank or another lender and using your house as collateral to acquire the loan. This can be beneficial, but it can also be risky. Also in this case – you should always pay attention to details and make sure you ask the right questions!

Typically, the people who consider home equity loans have good credit. They also have a fair amount of money in their house for it to be worth the loan. Usually, a key benefit to this would be having a lower interest rate.

You aren’t stacking a lot of money on top of what you owe, just a fraction of it. Also, you can put a good amount of money into your house and qualify for more money.

You should be careful, though. Unlike personal loans, this method puts your house at risk if you are unable to make the payments. This results in foreclosure. Seeing those signs up and around always brings you to be melancholy.

If you have ever had a friend or family member that had their home foreclosed, you know the tragedy and heartache it brings. It does have very low-interest rates and can sound appealing and ideal. Just be cautious, especially if you have a family.

Remember: You are making a tradeoff for this loan. It’s risky, especially if you aren’t 100% positive you can pay it off. If you fall behind, you can lose your house and be taken to court, being demanded to pay up.

Home equity loan for debt consolidation
Home equity loan is a risky source for funding. (Photo by Watchara Ritjan/Shutterstock)

4. Personal Line Of Credit

As an unsecured loan, a personal line of credit does not require security for approval. Similar to credit cards, personal lines of credit often include a defined credit limit, an adjustable interest rate, and a set payment schedule. Most of the time, you can only get a personal line of credit if you're already a client of a particular lender.

A personal line of credit varies from a straightforward personal loan in that you can withdraw money up to the predetermined limit whenever you need it. Furthermore, some lenders permit an open-ended agreement with no deadline for using your credit.

This can help you understand if you are likely not getting approved. It also enables you to understand whether or not you should be looking for lenders in the first place. Because of this reason, if your credit score is wrong or even just “okay,” you won’t be approved.

On the other hand, getting approved with “okay” interest might cause the lender to jack the interest rates “sky high.” It might not even be worth the line of credit, so do your math carefully. Remember that collecting this high interest could take a long time to pay off.

5. Debt Repayment Programs

There are debt repayment programs to help you get out of debt. This help when you cannot seem to get approved elsewhere. These programs promise you to have 0% interest rates and to be out of debt within a few years. They also roll your payments into one big payment.

Like I said earlier, this can be very beneficial and save a lot of time in the long run. Like with all loans and services, be careful. There have been some instances where the person seeking help is scammed. The best thing I recommend is to speak with a non-profit Credit Counsellor.

We have all been there or close to debt. It’s an awful feeling to be fighting to stay afloat. Check out the National Debtline or the Consumer Credit Counselling Service for information and help with these debts.

6. Borrowing From a Life Insurance Policy

Besides loans, you can also borrow a life insurance policy. It’s an extreme risk, but there are those who have done it to manage their debt. You generally are able to borrow the amount of money you owe on your loan and then use it to pay off the debt. You aren’t billed if the amount borrowed is less than what the policy is worth.

You can access the money in a cash value policy by taking a loan against it or even surrendering the policy.

We, however, recommend you make these payments. This strategy can be expensive, however, with fees eating up as much as 30% of the settlement value. There can also be tricky tax complications, so proceed with care.  In the worst case scenario, you die, and you pass that on to your family? Nothing. That’s tough. That is about as tough as it gets… all to pay off the loans you acquired. Consider this option only in emergency cases.

It's worth noting that you can't use this strategy with term life insurance policies, which are popular because they're less expensive. Obtaining cash value from life insurance is only possible with permanent life insurance, such as whole life or universal life.

Risk and reward in debt consolidation
Borrowing From a Life Insurance Policy only as a last resort. (Photo by small smiles/Shutterstock)

7. Retirement Borrowing

This, like the life insurance policy method, should be a method that is used after everything else fails. You can borrow money from most retirement plans. Don’t change jobs, though. If you switch up your job, the loan is due within 60 days, or you could be at risk of penalties.

Leveraging your retirement savings to pay off debt is appealing, but it is risky and must be done with caution. Consider that you lose not only the money you withdraw from investments, but also any future market gains.

Furthermore, you may have unintended tax consequences for yourself. To begin with, you may lose years of being able to deduct mortgage payments from your taxes. In case that isn’t bad enough, you have to pay it all back within five years. If you don’t, you will be charged a fee for early withdrawal as well as income tax.

What is The Safest Way to Consolidate Debt?

here are numerous ways to consolidate debt. A lot of people will consolidate by getting a personal loan. This means that you will be making a single fixed payment each and every month rather than having to make multiple payments covering various loans. Another secure way that people consolidate debt is by tapping into their home equity.

The proceeds from this process will go towards paying off the other forms of debt that you have accrued. You need to have enough equity in your home to do this. However, as this is a secured loan, you could lose the house if you fail to meet your repayment obligations.

You can combine all of your debt into one monthly bill in three main ways. You can take out a personal loan and use the funds to pay off all your outstanding debt. Then you will need to pay a single monthly payment when paying off the personal loan.

There is also the option to get a 0% APR credit card, but this is usually only accessible if you have strong credit. Then you are able to tap into your home equity and use these funds to pay off your various forms of debt in one go.

If you have credit card debt that has a hefty rate of interest, you might want to try to pay it off by any means necessary but you don’t have the funds on hand to do so.

You might have a sufficient credit score or home equity that you will be able to get the funds to pay off this credit card debt without having any money yourself. The proceeds from the personal loan or the home equity will go toward spaying off this debt. You will then need to meet the repayments on the respective resulting loan.

Debt management programs are a way that you can set up a payment schedule that will see your various credit card debt payments being consolidated into a single monthly payment.

As part of this process, there will be no loan, and credit scores will not be impacted. When you get involved in a debt management program, you will normally have to close each of your credit cards to make sure that you are not getting further into debt.

With debt consolidation, there can be a temporary dip in your credit score when you are going through the process of setting up the consolidation.

When you submit an application to get a personal loan, there will be a hard credit check conducted by the lender, which will lead to a drop in your credit score. If you get approved for this loan and your new credit account is opened, there will also be a dip in your credit score.

If you have unpaid debt that you are struggling to pay, you may be wondering what negative consequences can occur if you simply ignore it. Unfortunately, this is akin to burying your head in the sand. Just because you are not managing your debt does not mean that it will disappear.

For starters, missed payments will appear on your credit report, lowering your credit score. If that isn't bad enough, your creditors may take legal action to recover the debt. This can include selling the debt to a debt collection agency, who may harass you with phone calls or even doorstep visits.

Your creditors may also file a lawsuit against you, which may result in bank account levies or wage garnishment. As a result, it is critical that you continue to manage your debt.

If you have credit cards, loans, or other debt, one of the best ways to pay it off is to prioritize the debt with the highest interest rate first. If you have a credit card with a 18 percent interest rate and a loan with a 4.5% interest rate, you will pay far more in interest on your credit card, even if your outstanding balance is much lower.

While you are still paying off your existing debt, try to pay extra on your credit card. Once this is paid off, you will have significantly more funds to apply to your next highest interest debt account.

The qualifications for debt relief will vary depending on the debt relief company you plan to work with. In general, it is a good idea to consider debt relief if you have no way of repaying your unsecured debt even if you take drastic spending cuts within five years or if your total unsecured debt exceeds half of your gross income.

In terms of requirements, National Debt Relief, for example, will only work with consumers who have at least $7,500 in unsecured debt, but not more than $100,000. They will also take you into account if you have outstanding medical bills, business debts, or private student loan debt.

In this chart using data from Urban Institute, you can see that the age group 43 to 47 carries the highest average credit card debt. This age group has almost double the credit card debt of their under 32 year old counterparts or seniors aged 68+.



Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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