Debt Consolidation

You don’t need a loan to eliminate credit card debt. A debt management program consolidates all your credit card bills into one, lower monthly payment at a reduced interest rate. You can be debt free in 3-5 years.

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What Is Debt Consolidation?

Debt consolidation is a debt-relief option that combines multiple debts into a single payment with a more favorable interest rate and more affordable monthly payment. The result is that you pay off debt faster, while saving money.

There are several types of debt consolidation programs. The goal of each is to lower the interest rate on your debt and reduce the monthly payment to a level that you can pay it off in 3-5 years.

The major benefits of debt consolidation include:

  1. A single monthly payment – One payment, to one source, once a month. No more worrying about due dates and minimum payment amounts.
  2. Lower interest rate – Credit card interest rates can add hundreds – sometimes thousands – of dollars to your debt. Lowering the interest rate will reduce the amount of debt you pay.
  3. Pay off debts faster – Debt consolidation programs reduce the payoff time for credit card debt to 3-5 years. Trying to pay off high interest credit card debt by making minimum monthly payments can take 10 years or, in most cases, longer.

How to Consolidate Debt

You can consolidate debt using a debt consolidation loan or balance transfer credit card if you have a good credit. If you have poor credit, a debt management program or debt settlement will be the best way to consolidate your debt. You can also use home equity or a 401k – if you have it – but there are some consequences you should consider before pursuing those options.

Which Debts Can Be Consolidated?

A debt consolidation loan is primarily used to manage and pay off credit card debt, but could also be used for the following debts:

One thing to consider is that medical debt and utility bills don’t have interest rates attached to them. It might not be wise to use money from a loan (which will accrue interest) to pay off a debt that does not accrue interest.

Secured debts such as homes, property and automobiles can be refinanced, but are not considered candidates for debt consolidation.

Debt Consolidation Options and Their Pros and Cons

Debt consolidation is beneficial to some people, but not everyone. It comes in several varieties, each one having plusses that make it appealing and minuses that might make your situation even worse.

Because every person’s financial situation is unique, it is best to spend time examining each option and find the one that is right for you. Here is a look at some of the pros and cons of debt consolidation for each of the seven options.

Debt Management Plans

A debt management plan is a form of nonprofit debt consolidation that will reduce your monthly payments and interest rates without having to take out a loan.

Credit counselors work with your creditors and get you a single, fixed monthly payment that you can afford. The success rate for people enrolled in debt management programs is 55%. Make on-time monthly payments and you eliminate your credit card debt in 3-5 years.

Pros of Debt Management:

  • Credit counselors can secure lower interest rates from your creditors, often cutting them from 20%-25% and higher, down to 8% or lower.
  • Enrolling in a debt management plan will stop calls from collection agencies.
  • A structured plan will give you a finish-line date to shoot for.
  • You can schedule your monthly payment due date.
  • Access to financial literacy programs that can teach you how to save money, build an emergency fund and set achievable financial goals.

Cons of Debt Management:

  • There is a one-time, set-up fee as well as a monthly fee.
  • You can’t miss a payment. If you do, the concessions on interest rates go away.
  • You must stop using all credit cards.

Personal Loans

Banks, credit unions and online lenders offer personal loans to consolidate debt. It also is known as a debt consolidation loan.

The loan is used to pay off all credit card debt, leaving the borrower with a single monthly payment, interest rate and due date. The drawback is that these loans require a good credit score, which might be difficult to achieve if you are already in debt.

Pros of Personal Loans:

  • Interest rates should be lower than credit card rates. according to the Federal Reserve, the average personal loan carries a 9.58% interest rate in 2022, compared to 18.5% for credit cards.
  • A personal loan is a fixed payment over a fixed period of time. Your credit card balances are revolving and continue to change, which makes it hard to calculate the cost of interest and when you will finish paying it off.
  • Personal loans can be used to pay off any type of debt as long as it is unsecured.

Cons of Personal Loans:

  • No flexibility in monthly payment. Credit cards have a minimum, while the monthly payment on a personal loan is fixed.
  • The interest rate is based on your credit score, which could be very low due to credit card debt.
  • Personal loans might include origination fees, which are based on a percentage of the loan, but don’t count toward the balance.

Balance Transfer Cards

Many banks offer credit cards that allow you to transfer the balance on your cards to a new card with a 0% interest charge. You must have a good-to-excellent credit score (above 680) to qualify for one.

The 0% interest is known as an “introductory rate” that expires, typically after 12-18 months. The rates on the cards then jump to between 15% and 25%. There also is a 3%-5% transfer and late fees could be applied.

This could be a dangerous move, unless you are sure you can pay off all your debt during the introductory rate period.

Pros of Balance Transfers:

  • No interest for a year or sometimes as long as 18 months, so it gives you time to eliminate debt without paying interest.
  • Combines all your credit card debt into one payment.

Cons of Balance Transfers:

  • When the 0% interest expires, the new rate might be more than your previous rates.
  • Most cards have balance transfer fees of 1%-3%.
  • You must have good credit to qualify, which is difficult to do if you have credit card debt. You may need to look into other options for debt consolidation with bad credit.
  • Clearing the balance off your other cards, means more credit available. If you use that extra credit, you run the risk of going deeper into debt.

Home Equity Loans

If you have equity in your house – it’s worth more than what you owe on it – you can borrow against that amount. The interest rates on home equity loans are lower than interest on credit cards, but there is a significant risk here: You could lose the home if you miss payments on this loan.

Pros of Home Equity Loans:

  • Interest rates for home equity loans averaged from 5% to 7% at the start of 2022, far less than credit cards and personal loans.
  • Longer loan term (5-15 years) makes monthly payments more affordable.
  • Interest rate is not dependent on credit score because the loan uses your home as collateral.
  • Interest is tax deductible, but only if you use the money to build or renovate your home.

Cons of Home Equity Loans:

  • If you don’t keep up with your payments and default, your home could be foreclosed.
  • Most lenders have a minimum loan amount that may be more than you need.
  • Longer repayment terms will be more expensive in the long run.

Borrowing from 401(k)

Rules vary on this, but usually, you are allowed to borrow up to 50% of your retirement fund to a maximum of $50,000 and pay it back within five years.

The interest rate is low (usually prime plus 1%), but there are risks here. There are tax consequences and penalties for withdrawing from a 401k and you lose a lot of the power of compounding interest that helps the account grow. Only consider this as a last resort.

Pros of 401(k) Loans:

  • No minimum credit score required and no loan application.
  • Lowest interest rate you can get.
  • Repayment is simply taken out of your paycheck.

Cons of 401(k) Loans:

  • The money saved in interest will be lost in multiples in your retirement account from the effects of taking money out of a fund that would have been earning compound interest.
  • This is money that would have been protected from creditors during bankruptcy. If you continue your financial troubles the borrowed money is already exposed.
  • There are tax consequences and penalties.
  • You can only borrow from 401K plan if you’re employed by the company that offers the plan.
  • Not all 401K plans allow loans.

Debt Settlement

If your bills have reached the stage where they have been sold to debt collectors, this might be your only option. Debt settlement companies advertise that they will reduce the amount you owe by 50%, but when interest, late fees and program fees are factored in, the real reduction is closer to 25%.

Debt settlement becomes a severe negative mark on your credit report for seven years and will damage your credit score by 100-200 points. You also must pay taxes on any amount the lender forgives. Be careful of debt settlement, especially if you hope to buy a house or car in the near future.

Pros of Debt Settlement:

  • You could end up paying less than you owe.
  • Debt collectors will stop harassing you.

Cons of Debt Settlement:

  • It is a very risky strategy. If you have multiple creditors, you have to negotiate a settlement offer with each one and they are not obligated to accept your offer. In fact, many won’t.
  • Debt settlement companies ask you to quit paying creditors while they negotiate, which means you rack up interest charges and late fees on your credit cards while the process plays out.
  • Debt settlement is reported to credit agencies and noted on your credit report for seven years, which will drag down your credit score 100-200 points.
  • Debt settlement companies charge a substantial fee, usually 20-25% of the final settlement.
  • The IRS counts whatever money that is saved during the settlement as income, which would require you to pay tax on it.

Debt Consolidation Alternatives

Debt consolidation is not necessary every time you fall behind financially.

For some people, the unexpected loss of a job or an accident that brings on severe medical costs, is enough to create problems, but in most cases, people simply mismanage their money. They have enough income to handle everyday expenses, but overspend on things like houses, cars, vacation, clothing and eating out.

In either case, there are solutions that allow consumers to get back on their feet. Here are some of the alternative choices that can help stabilize your situation and eventually eliminate your debt.

Balance Your Budget

The most effective alternative to consolidating debt is learning to live on less than what you make. In other words, make a budget … and stick to it! Take the time to list income and expenses, then adjust those numbers until the column under “income” exceeds “expenses.” There are plenty of budgeting apps that should help make this process workable, if you are disciplined about it.

Do-It-Yourself (DIY) Debt Management Plan

Credit counselors work with credit card companies to lower interest rates. You could try doing to the same for yourself. You may not have the same leverage as someone with the backing of a credit counseling agency, but DIY debt management is worth a shot. Start by calling each of your card companies and asking them to lower your interest rate. Then, use a combination of the other alternative methods like balancing your budget and debt stacking.

Debt Stacking

Debt stacking, also called the debt avalanche method, is a DIY debt elimination strategy. Start by ordering your debts from the highest interest to the lowest. Next, pay the minimum balance on all of your credit cards and put whatever money is left in your budget toward the debt with the highest interest rate. Once that is paid off, move on to the debt with the next highest interest rate. The card with the highest interest rate is costing you the most money. Wiping out that card first will save you the most money.

Snowball Method

The debt snowball method is similar to debt stacking, but instead of ordering credit card debts by interest, order them from the lowest balance to the highest balance. Again, pay the minimum balance on all your cards. Then, use the rest of the money to target the card with the lowest balance. Once that card is paid off, move on to the card with the next lowest balance. This will help you pay off a single debt faster. The theory is that once you see a debt wiped clean, you will be motivated to continue paying off your other debts.

Credit Card Hardship Programs

This is the corporate alternative to a debt management plan, but it is more difficult to qualify for. Credit card hardship programs can reduce interest rates and monthly payments as well as waive late fees. However, these benefits are only available in “hardship” situations like job loss, severe accidents or long-term illness.


Bankruptcy is a last-ditch solution when no other debt-relief option will work. Chapter 7 is the most popular form of bankruptcy, but you must qualify for it by earning less than the median income in your state. The other form of personal bankruptcy is Chapter 13, which allows you to set up a 3-5 year payoff plan for your debt. The rule of thumb is that if you can’t come up with a plan to pay off your debt (minus your mortgage) in five years, bankruptcy is a good choice. It gives you a second chance to get things right, but it comes with a high price. It will stay on your credit report for 7-10 years and make it difficult to get credit during that time.

» More About: Bankruptcy vs. Debt Consolidation

When Debt Consolidation Is Worth It

If you aren’t sure whether you can pull yourself out of a financial mess, try an online credit counseling session. Be sure the agency’s credit counselors are certified by the National Foundation for Credit Counseling. Ask them to review your assets and expenses and recommend a course of action. The call is free.

If you are not a viable candidate for debt consolidation, they could recommend bankruptcy. Despite its reputation, bankruptcy is not a financial death sentence. It is a chance to start over and with the right direction from a bankruptcy attorney, you could be back on your feet financially in as little as two years.

Signs You Should Consolidate Debt

  • You are spending more money than you are making.
  • Your credit card balances are growing, not shrinking.
  • You’re making only the minimum payments on your debt.
  • You have been turned down for a credit card or store installment loan for having a high debt-to-income ratio.
  • You carry debt on more than 5 credit cards.
  • You are approaching or are at your credit card limits.
  • You carry a balance on credit cards with interest rates in excess of 18.99%.

Signs That Debt Consolidation Is a Bad Idea

  • Missing monthly mortgage or rent payments.
  • Falling behind on utility bills.
  • Maxing out your credit cards.
  • Receiving calls from debt collectors.

Debt Consolidation Calculator

Use the debt consolidation calculator below to estimate how much you could save by consolidating your debt.

Getting Started with Debt Consolidation

It might be difficult to choose which of the many debt consolidation options would work best for you. If that’s the case, make a phone call to the credit counselors at InCharge Debt Solutions and get a free credit counseling session.

The counselors are trained and certified in budgeting, consumer credit and money management. They will help you create an affordable monthly budget, review each of the debt-relief options and give you advice on which one will best suit your situation.

Federal law demands they give you the best option or risk the company’s nonprofit status as a 501(c)3 agency.

Get Help Consolidating Your Debt Today

InCharge Debt Solutions can consolidate your debt today, and if debt consolidation is not the best solution for you, our credit counselors will help decide your next steps.

Frequently Asked Questions

Debt consolidation should have a positive effect on your credit score because you must make on-time payments, which count for 35% of your score. It also will reduce the credit utilization that accounts for 30% of your credit score.

The fact that you enrolled indicates that you overspent with credit cards and that is a negative in computing your credit score.  Credit utilization is the percentage of spending based on your credit limit. If you have a $1,000 credit limit and charge $500 on your credit card, you have a credit utilization ratio of 50%. Lenders want to see you spend 30% or less of your credit limit each month.

The reason most consumers consolidate debt is because they have maxed-out multiple credit cards, which obviously puts them well over their credit utilization ratio.

The credit utilization ratio only considers revolving lines of credit and not installment loans. Transferring your debts from credit cards to a consolidation loan will reduce your credit utilization ratio and improve your credit score.

Most credit counselors advise you to close credit accounts when consolidating credit. This is a good idea if it stops you from using multiple credit cards to rack up debt. Just understand that your credit score will take an initial hit from closing credit accounts. Length of credit history makes up 15% of a credit score, and the older the credit account, the better it is for your score.

This shouldn’t be an issue since your primary goal should be paying off your debt. Until then, your credit score isn’t important.  What’s more important is to make your monthly payments, and, in the future, keep your credit card balance below 30% of the limit. Payment history and utilization ratio account for 65% of your credit score.

It’s possible to consolidate debt when you have bad credit, but you should be prepared to pay more to do so. Bad credit typically means credit score is suffering. Lenders want credit score of 680 or higher to consider you for a good interest rate. Anything below that and you will be paying subprime (aka “high”) interest rates.

Before you apply for a loan, check your credit report and credit score. If it is too low, give yourself time to beef it up by making on-time payments on all your accounts. If you need help faster, ask a friend or relative with a great credit score to co-sign the loan, or ask them to loan you the money themselves.

Other possible alternatives include debt management programs, home equity loans, online lenders.

There is no definitive answer for this because each consumer’s situation has unique factors to account for. Generally speaking, a debt consolidation loan is a good way to pay off credit cards if it reduces the amount of interest you’re paying on your debt and simplifies the payment process.

A debt consolidation loan shrinks your obligations to a single payment to single lender, once a month. If nothing else, it’s makes drawing up and sticking to a budget easier.

The problem comes in doing the calculations necessary to confirm that there also is a financial gain to using a single loan to pay off unsecured debt. That takes time and discipline, but if done properly, you could find out that a debt consolidation loan is not only easier to handle, it’s more beneficial financially.

While traditional debt consolidation loans can end up hurting your credit or tempt you to start using your credit cards again once they are paid off, the debt consolidation alternative provided by InCharge has few downsides.

You are getting the convenience of consolidating your debt into one payment, lower interest rates and a path to paying off your debt in three to five years. You won’t be able to use your credit cards after enrolling, so you won’t be tempted to acquire more debt. In summary, yes, it is a good idea to consolidate debt. Get started today by calling or starting online debt consolidation.

Before reaching out to a debt consolidation company, take some time to go through the following debt consolidation checklist:

  1. Figure out your total credit card debt: that’s all of your balances added together
  2. Calculate the average interest rate you are currently paying for your debt. Try to find a debt consolidator who will offer you an interest rate that is at least 3 to 5 percent lower.
  3. Add up how much credit card interest you paid last month.
  4. Add up the total of your current minimum payments. If you can’t afford your current minimums, and a debt consolidator gives you an estimated consolidated monthly payment that is equal to or greater than your current minimums, you can’t afford that either.

How Nonprofit Debt Consolidation Works

A nonprofit debt consolidation program offers many of the benefits of traditional debt consolidation with few of the negatives.

Types of Debt Consolidation

Online Debt Consolidation

You can enroll in an online debt consolidation program, if you qualify through nonprofit credit counseling.

Debt Relief Options

Credit Consolidation

Learn the pros and cons of different credit consolidation options including online consolidation loans from Lending Club, Debt Settlement options and nonprofit debt consolidation services.

More about credit consolidation

About The Author

Tom Jackson

Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.


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