If you’re carrying balances on several credit cards, you’re keeping track of different due dates, interest rates, and minimum payments each month. It can also be hard to tell how long repayment will take or how much interest those balances will cost.
Debt consolidation brings selected debts together under one new loan or credit account. This can make repayment easier to manage, but the value of consolidating comes down to the terms you receive and how they compare with your current debt.
This guide explains how debt consolidation works, its pros and cons, the most common consolidation methods, and how to decide if it’s a good idea for you.
Debt consolidation is the process of combining two or more debts under one new loan or credit account. For example, you can use a personal loan for debt consolidation to pay off three credit cards and then make one monthly payment on the new loan.
Consolidation doesn’t erase or forgive the amount you owe. Instead, it changes how you repay it. Depending on the terms, the new financing can provide:
The goal is to create a repayment plan that is easier to manage or less expensive than continuing to pay each balance separately.
The exact process varies based on the financing method, but consolidating credit card debt follows four steps.
List the balance, annual percentage rate (APR), monthly payment, and due date for each debt you’re considering. This gives you a clear picture of how much you owe and what the balances currently cost.
Review the APR, fees, payment, repayment term, and total cost of each method. A personal loan, balance transfer card, and home equity product can all combine debt, but they work differently.
Once you’re approved, use the funds or credit line to pay off the selected debts. Continue making payments on the original accounts until each payoff or transfer is complete.
After the balances are consolidated, make the required payment on the new loan or credit account. Try not to add new balances to the cards you just paid off. Otherwise, you’ll have both the consolidation payment and new credit card debt.
Debt consolidation can make repayment more manageable, but you’ll want to weigh both the potential advantages and drawbacks.
|
Potential Advantages |
Potential Drawbacks |
|
Combines several payments into one |
Loan, transfer, or closing fees may apply |
|
May provide a lower annual percentage rate (APR) |
A lower payment could result from a longer term |
|
Can establish a clear payoff date |
A longer term may increase total interest |
|
Can make monthly budgeting easier |
Applying can temporarily affect your credit |
|
Paying down card balances can lower credit utilization |
Consolidation doesn’t prevent new card spending |
|
A personal loan can provide fixed payments |
Home equity borrowing puts your property at risk |
Debt consolidation is most useful when the new financing improves how you repay your debt. If it only moves the balances without lowering costs or creating a manageable payment, it doesn’t provide much value.
You can consolidate debt with a balance transfer credit card, personal loan, home equity loan, or home equity line of credit (HELOC).
A balance transfer moves debt from one or more credit cards to a new card. Some cards offer a low or 0% introductory annual percentage rate (APR) for a set period.
After opening the account, you request transfers from the existing cards and repay the combined balance on the new card. Continue paying the original cards until each transfer is complete.
A balance transfer may work well when you qualify for a sufficient credit limit and can repay the balance before the promotional period ends. Transfer fees may apply, and any remaining balance will be subject to the card’s regular APR after the promotion.
A personal loan for debt consolidation provides a lump sum you can use to pay off selected credit card balances. You then repay the loan through scheduled monthly installments.
Some personal loans offer fixed payments and a defined repayment term. An unsecured personal loan also doesn’t require you to borrow against your home or another asset.
Before applying for a debt consolidation loan, check the annual percentage rate (APR), fees, monthly payment, repayment term, and total amount repaid.
If you own a home, you may be able to borrow against its equity through a home equity loan or home equity line of credit (HELOC).
A home equity loan provides a lump sum with scheduled payments. A home equity line of credit, or HELOC, is a revolving line that allows you to borrow up to an approved limit.
Many HELOCs have variable rates, but WEOKIE’s home equity loan and HELOC are both fixed-rate.
Because the debt is secured by the home, these products may offer lower rates than unsecured borrowing. The application process can take longer and involve a property valuation, title review, and closing costs.
The main risk is that your home secures the debt. If you can’t make your payments, you could lose your home.
Debt consolidation can affect your credit in a few ways. When you apply for a new loan or credit account, the lender may make a hard inquiry, which can cause a small, temporary dip in your score. Opening a new account can also affect your credit.
There can be positive effects, too. Using consolidation to pay down credit card balances can lower your credit utilization, or the percentage of your available credit you’re using. Making your new payments on time can also benefit your credit over time.
WEOKIE members can track their score with our Free Credit Score.
Debt consolidation doesn’t automatically prevent you from buying a home, but the timing can matter. Mortgage lenders look at factors including your credit and debt-to-income ratio (DTI), which compares your monthly debt payments with your gross monthly income.
A new consolidation loan can affect both. The application and new account can affect your credit, and the new monthly payment becomes part of your debt-to-income calculation. If consolidation lowers your required monthly debt payments, it may improve that ratio, depending on the terms of the loan.
If you’re planning to apply for a mortgage soon, it’s smart to avoid opening new credit right beforehand. A WEOKIE mortgage lender can talk through your timeline with you before you make a change.
Debt consolidation makes the most sense when the new financing lowers your borrowing costs, creates a payment you can manage, or provides a clearer payoff schedule.
Here’s a hypothetical example comparing a personal loan with continuing to make three separate credit card payments.
|
Debt |
Balance |
Annual Percentage Rate (APR) |
Monthly Payment |
|
Balance Transfer Credit Card |
$5,000 |
24% |
$150 |
|
Home Equity Loan |
$4,000 |
22% |
$120 |
|
HELOC |
$3,000 |
20% |
$90 |
|
Total |
$12,000 |
— |
$360 |
Want to run your own numbers? Use our Debt Consolidation Calculator to estimate how consolidating could affect your monthly payment and payoff cost.
If the listed payments, rates, and balances remain unchanged, the three cards would take up to approximately 56 months to repay and cost an estimated $6,976 in interest.
Now suppose you qualify for a personal loan with these terms:
Here’s how the two approaches compare:
|
Repayment Method |
Monthly Payment |
Estimated Interest |
Estimated Payoff Time |
|
Three credit cards |
$360 |
$6,976 |
Up to 56 months |
|
Personal loan |
$316 |
$3,168 |
48 months |
|
Potential difference |
$44 less per month |
$3,808 less interest |
About 8 months sooner |
*This example assumes no new purchases, late fees, rate changes, or personal loan origination fees. It also assumes the stated credit card payments remain fixed rather than decreasing as the balances decline. Actual results will vary based on the terms of each account.
Before applying, ask yourself:
Consolidation may not be worthwhile if the new rate is similar to your current rates, the fees cancel out the savings, or a longer term greatly increases the total cost.
It’s also worth thinking about what led to the balances. Consolidation can reorganize your debt, but a workable budget can keep new card balances from taking their place.
If you’d like to talk it through, WEOKIE is happy to go over your budget or repayment plan with you.
As a member-owned credit union, WEOKIE is here to give you a clearer way to tackle your debt and understand your repayment path.
At WEOKIE, our debt consolidation loans come with:
If you qualify for the 60-day payment deferral, interest will continue to accrue during that time.
Still weighing the pros and cons? Stop by any WEOKIE branch or give us a call. We’ll look at your balances with you and help you decide on the best next step.
See what a WEOKIE debt consolidation loan could look like for you.