Debt consolidation is a debt settlement method in which a person combines their various debts into one, monthly payment.
Juggling multiple creditors is exhausting. Everything else aside, it’s a problem of organization—you’re constantly tracking all of your bills, each with different due dates, payment minimums, and APRs. On top of that, there’s the compounding interest of each debt, which adds onto itself each month and makes it that much harder to become debt free.
Debt consolidation is designed to solve both of these issues. Instead of managing multiple debts, you just have one. And if you find the right debt consolidation loan, your one debt will have a lower interest rate than your previous debts, making it easier to pay back your loan in your own time.
How Debt Consolidation Works
There are three different ways to consolidate debts. No matter which one you choose, they all achieve the same basic goal: simplify your debt.
1) Work with a Debt Consolidation Company
Of the three methods, this is the most hands-off approach. A debt consolidation company is a third-party business that specializes in combining your multiple debts into one, monthly payment. A debt consolidation company may make it easier to consolidate debts into a loan payment with a lower and more favorable interest rate, thanks to services such as offering loan comparisons, negotiating debt settlements with creditors, and providing one-on-one debt counseling.
2) Take Out a Debt Consolidation Loan
Debt consolidation loans are a type of personal loan, where instead of using the money from the personal loan to pay for a wedding or a home renovation, you use it to pay off your other debts. As soon as your debts are gone, you can focus on paying off your single debt consolidation loan.
This approach is more hands-on; you’ll want to compare loans before applying to one that will lend you the right amount of money at the right interest rate. Always look for a lower interest rate than your current debts, as it will save you money in the long run.
3) Transfer Debts to a New Credit Card
In this DIY method, you’ll apply for a new credit card with a favorable introductory APR offer. Once accepted, you’ll use your new low-interest card to pay off all (or as much as possible) of your existing debt.
This plan works best if you can move all of your debt onto the new card and pay everything off before the end of the promotional offer. Depending on your credit, you might be able to snag a credit card that offers 0% APR for six months or even up to two years.
What Type of Debt Consolidation is Best for Me?
When it comes to deciding which debt consolidation method is best for you, you’ll want to consider how much total debt you have, how many creditors you owe money to, and your personal spending habits.
- Debt Consolidation Company: If you have $10,000+ in debt from multiple creditors or a credit score below 630, a third-party debt consolidation company may be your best bet to combine debts into one, favorable, monthly payment.
- Debt Consolidation Loan: If you have less than $10,000 in debt and a credit score of at least 630, a debt consolidation loan should offer a lower interest rate.
- New Credit Card: If you have less than $10,000 in debt and a credit score of 690+, you have a strong chance of getting accepted for a strong credit card with a low or 0% APR.
You don’t have to do hours and hours of debt consolidation research all on your own. To help you find what you’re looking for, we’ve gathered a list of some of our favorite debt consolidation and debt relief companies, all on our website.