How to Consolidate Your Debt

Article Updated July 16, 2018.

Are you trying to figure out how to consolidate your debt? One of our readers, Ricky, wrote on the blog that he is “trying to consolidate bills since divorce to get back on track.”

Another reader, Norma, wrote:

“I have too much credit card debt with high interest. I applied for a loan to consolidate all into one payment; I didn’t get it because of something on my credit report. My payments are always on time by using auto payments. Sears raised the interest to 16.24%, Chase raised theirs to 29.99%, and there is no talking them down either. I plan not to use either of the cards again now or after they are paid off.

How can they charge such high interest on credit cards when the savings account is paying 1.25%?”

Once you’ve decided to consolidate your debt, there are several necessary steps you need to take so that it’s ultimately beneficial for you.

Check Your Credit Reports and Get Your Credit Scores

You can get your credit reports from each of the three major credit reporting bureaus for free once a year. It’s a good idea to review them, so you don’t end up in the situation Norma found herself in, getting denied due to a mistake or negative items you weren’t aware of on your credit reports.

Your credit report should also list most, if not all, of your debts, which will help you with the second step.

You can check your credit score for free using’s Credit Report Card. It will show you what factors in your credit are strong and what may need some work. You can also find out whether your credit is excellent, good, or not so hot.

Take an Inventory of Your Debt

Make a list of the balances you owe on each of the cards or loans you want to consolidate, along with the interest rates and the monthly payments. Doing so will help you identify the debts that are most important for you to consolidate.

For example, in Norma’s case, while both of her interest rates are high, she should try to consolidate the balance at 29.99% first, since it is the highest.

It is important to see the big picture when it comes to the total amount of your assets and your liabilities. By seeing this bigger picture, you will be better prepared to set more realistic financial goals for your future.

When listing your assets, you should include all of your savings accounts, business accounts, and home equity you may have and then you need to make a list of all your liabilities, or debts.

When doing so, make sure to include all your debt like credit cards, student loans, and mortgage or car loan payments. You can then take a closer look at the interest rates you have for each and how much is still owed on each account. This will give you a clear picture of where you might currently stand financially.

Research Debt Consolidation Options

You may be able to consolidate all your debt with a loan from your local bank or credit union, an online lender that offers personal loans, or by transferring a balance from a high-rate credit card to a low-rate one.

If you get a consolidation loan online, be sure to deal with reputable lenders as there are scammers who will take the information consumers submit with applications and use it fraudulently.

Before you apply, try to find out if the lender can provide you any information about its credit requirements. Some lenders, for example, may require a minimum credit score or won’t extend credit to those with bankruptcies listed on their credit reports.

Debt consolidation is debt refinancing and may be a good option for you if you are experiencing higher than normal interest rates, and you want to find ways to control and pay off these debts in a much simpler manner.

However, the very best way to consolidate your debt is to keep all your balances low to avoid this higher interest, pay all your bills on time, manage all your credit card accounts responsibly, and avoid opening several new credit card accounts as just a way of trying to increase your available credit.

A balance transfer is a simple and usually straightforward method of consolidating debt. A balance transfer works to shift the credit card debt from one or several credit cards to another credit card that carries a much lower interest rate.

Subsequently, all of your monthly payments will be paid at one time, on one card, which consolidates your debt into one monthly payment, rather than several.

Another way to help with debt is debt settlement. This is the process of negotiating with all of your current creditors to find a way to reduce the amount of debt that is owed across your accounts.

If a settlement is reached, a creditor may agree to forgive a certain percentage of the debt. Typically, debt settlement will only apply to unsecured debt. In other words, debt that is not secured by any type of assets such as a home or automobile.

If you find you need more help, you can then also consider what a consolidation loan can do for you.

Apply for a Consolidation Loan

Once you’ve narrowed down the field of places to get a consolidation loan and learned as much as you can about their lending requirements and your debt consolidation options, it’s time to apply for a consolidation loan.

In most cases, you can get an answer almost immediately. If that answer is “yes,” you can move onto the next step.

If the answer is “no,” take a careful look at the reasons, you were turned down. If you think those answers don’t really apply, try calling the lender and ask to be reconsidered for the account. If you are turned down due to the debt you are carrying, for example, but explain that you are going to use the new loan to consolidate that debt, you may have a shot at getting the loan. It doesn’t hurt to ask!

If you can’t get approved for one of these loans after trying a couple of lenders, you may want to talk with a credit counseling agency. These agencies can often help clients lower their interest rates or payments through a Debt Management Plan (DMP).

If you enroll in a debt management plan, you’ll make one payment to the counseling agency which will then pay all your participating creditors, so even though it’s not technically a consolidation loan, it feels like one.

Consolidate Your Debt

If you are approved for a consolidation loan, you can then use that new loan to pay off other debts. If you don’t get a new credit line large enough to consolidate all your debt, focus on paying off your higher rate loans or balances first.

Pay Your Loans Off as Fast as Possible

If you can add a little extra to your monthly payment, you’ll be able to pay off your new loan faster. Even if you don’t, you’ll want to do your best to avoid the temptation of tapping the credit lines you have just paid off. After all, your goal consolidating your debt should be to dig out of debt — not to dig the hole deeper!

Is Debt Consolidation the Right Choice?

While there are several pros and cons for each type of debt consolidation program or debt management program, you must take a moment and really reflect on why it is you are in debt in the first place. After receiving and using a debt consolidation loan to pay this debt, are you going to be able to prevent it from happening again?

You need to be financially responsible to ensure that a debt consolidation loan will work for you. While it may help you get out of debt a lot faster, it is not a long-term solution for financial security and stability.

Once you use the loan to pay off your debt and credit cards, those high balances will once again become available for use. Can you stop yourself from using your limits again? If not, you will be in the very same position in the very near future.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly,’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Image: iStockphoto

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