Debt consolidation means rolling several debts into one new one, ideally at a lower rate. Done right, it can save money and simplify your life. Done wrong, it can leave you with more debt than you started with. Here’s how to do it right.

Step 1: Figure out why the debt happened

The Consumer Financial Protection Bureau’s advice is to look at why you’re in debt and build a budget before taking on a new loan.¹ If you’re spending more than you earn every month, consolidating won’t fix that.

Step 2: List every debt

Write down each balance, its interest rate and your minimum payment. Our consolidation calculator works best with your real totals.

Step 3: Know your options

• Personal loan: one fixed payment, sometimes at a lower rate.¹ Watch out for low payments that come from stretching the term, which can cost more overall.¹
• Balance transfer card: often a low or 0% promotional rate, usually with a transfer fee. When the promo ends, the rate can jump.¹
• Home equity loan or HELOC: borrowing against your home, which puts your home on the line if you can’t pay.¹
• Talking to your creditors: ask your card companies about a lower rate, waived fees or a better due date. It costs nothing to ask.¹

Step 4: Run the numbers

Compare the total cost of paying your cards as you are now with the total cost of the new loan, including any fee. If the loan doesn’t save money, or the payment doesn’t fit your budget, it’s not the right move.

Step 5: Pay off the cards, and leave them at zero

This is the step that makes or breaks consolidation. If the cards fill back up, you’ll have the loan payment and new card debt. Consider removing saved cards from shopping sites and apps.

When to get free help instead

If the numbers don’t work, talk to a nonprofit credit counselor. They can review your budget and may set up a debt management plan.² Be careful with debt settlement companies: they’re typically for-profit, and warning signs include upfront fees, guarantees and being told to stop talking to your creditors.³

How to reach a nonprofit credit counselor: call the National Foundation for Credit Counseling at (800) 388-2227 (nfcc.org), or the Financial Counseling Association of America at (800) 450-1794 (find a counselor). Ask for any fees in writing before you sign up.

See if consolidation could work for you: Check debt consolidation loan rates (paid link)

Sources

1. What do I need to know about consolidating my credit card debt?, Consumer Financial Protection Bureau.
2. What is credit counseling?, Consumer Financial Protection Bureau.
3. How To Get Out of Debt, Federal Trade Commission.

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