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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Home » options » Debt Consolidation

What Is Debt Consolidation?

Debt consolidation combines multiple debts into a single payment with a more favorable interest rate and more affordable monthly payment.

There are several types of debt consolidation programs, and 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 off in 3-5 years.

There are three major benefits of debt consolidation:

  1. A single monthly payment – One payment, to one source, once a month. No more worrying about due dates and minimum payment amounts. Debt consolidation simplifies the bill-paying process.
  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 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.

The traditional method of consolidating debt is to take out one large loan from a bank, credit union or online lender and use it to pay off several smaller debts. It can be effective, unless you have a low credit score, in which case you may not be approved for a debt consolidation loan, or the loan carries such a high interest rate that it is of no benefit.

If a low credit score was the reason you were turned down for a debt consolidation loan, then consider a debt management plan, an easy – and very effective – way to consolidate debt.

A debt management plan provides the same benefits as a debt consolidation loan – reduced interest rate and lower monthly payment – but without the hassle of taking on a loan. Also, your credit score is not a factor for enrolling.

Debt management is a plan offered by nonprofit credit counseling agencies, like InCharge Debt Solutions that will consolidate your credit card debt into one monthly payment and the interest rate drops to somewhere around 8%.

How to Consolidate Debt

First, you will want to decide on the best way to consolidate your debt. As mentioned above, debts can be consolidated with or without a loan.

If you don’t qualify for a debt consolidation loan or don’t have a high enough credit score to get a low interest rate loan, your best choice is a debt management plan offered by nonprofit credit counseling agencies.

Consolidating Debt without a Loan

  1. Begin with a phone call to a nonprofit agency like InCharge Debt Solutions and receive a free credit counseling session.
  2. A credit counselor will review your budget, analyze your debt and recommend the debt-relief solution that is best for your situation.
  3. If your income is enough to cover basic living expenses and make monthly payments, you have the option to enroll in a debt management program.
  4. Nonprofit credit counseling agencies have agreements in place with credit card companies to substantially reduce interest rates and relax fees through its debt management programs (Note: This is NOT a negotiation to “settle your debts” – a solution used by for-profit debt settlement companies).
  5. Once enrolled, debt management programs are designed to automate your payments to credit card companies and pay off your debts in 3-5 years.

Consolidating Debt with a Loan

  1. Make a list of the debts you want to consolidate.
  2. Next to each debt, list the total amount owed, the monthly payment due and the interest rate paid.
  3. Add the total amount owed on all debts and put that in one column. Now you know how much you need to borrow with a debt consolidation loan.
  4. Add the monthly payments you currently make for each debt and put that number in another column. That gives you a comparison number for your debt consolidation loan.
  5. The next step is to approach a lending source and ask for a debt consolidation loan (sometimes referred to as a personal loan) that covers the total amount owed. Ask how much the monthly payment will be and what interest rate charges are.
  6. Finally, do a comparison between what you currently pay each month and what you would pay with a debt consolidation loan.

How much money will debt consolidation save you? Use this calculator to find out.

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:

Debt management plans primarily consolidate credit card debt, which is the most common reason to consolidate debt. But you can also add past due utilities, collection accounts, payday loans and medical debt for “payment convenience.” In other words, there isn’t a reduction in interest rates, but consolidating those debts can simplify bill paying.

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.

Debt management programs can pay the bills for you without having those debts accumulate 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 good and bad sides of the seven debt consolidation options.

Debt Management Plans

Debt management 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. 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 15.5% for credit cards.
  • A personal loan is a fixed payment over a fixed period of time. 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, also known as debt consolidation loans, can be used to pay off any type of unsecured debt.

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 companies 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 could be transfer and late fees 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%.
  • 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. 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.
  • Debt settlement companies ask you to quit paying creditors while they negotiate, which means you rack up interest and late fees in the process.
  • Debt settlement is reported to credit agencies and noted on your credit report for seven years, which will drag down your credit score.
  • 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.
  • Lenders don’t have to accept a settlement offer.

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 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 debt.

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.


If you get to the point where you not only struggle to make payments on your house, car and credit cards, you can’t even afford to pay your light bill, it’s probably time to consider bankruptcy. 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.

Should You Consolidate Your Debt?

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

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 Comparison

The plusses and minuses of debt consolidation programs listed below can leave your head spinning. That is why it’s best to call a nonprofit credit counseling agency like InCharge Debt Solutions before making a final decision.

The counselors at InCharge are trained and certified to sort through the plusses and minuses listed below and find out which one solves your problem. The company’s status as a 501(c)3 agency is dependent on counselors offering advice that is in the client’s best interest.

Debt Management

  • No new loan
  • One-time setup fee and modest monthly fee
  • No credit requirement
  • Credit counselors help you secure lower interest rates
  • Nonprofit company disburses your monthly payment to individual creditors
  • Free access to debt counselors and exclusive educational material

Debt Consolidation Loan

  • Take out a new loan
  • High loan origination costs
  • Good credit is a requirement for eligibility
  • Consolidation interest rates may be relatively high
  • New debt consolidation loan pays off several smaller loans
  • No support from lender

Debt Settlement

  • Must stop paying creditors
  • Fees include percentage of settlement
  • Credit is severely damaged
  • Settlement company negotiates a lump sum payment with creditors
  • Monthly payments are used to build up the lump sum

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

George Morris

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.


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