How to Consolidate Debt

After making only minimum automatic payments on your debt for well over a year, you decide to take a look at your finances, and you’re not too pleased with what you discover.

That pinball machine you simply had to have, your pet’s bills and trip to Belize seem to have really added up.

Despite handing over what feels like a ton of money every month, your debt just seems to keep increasing. You need something to make your debt easier to manage, and it wouldn’t hurt if you could decrease your interest rates.

Here’s why debt consolidation could be a great option.

What is debt consolidation?

Debt consolidation is the process of combining existing, multiple debts into a single new debt.

Instead of many bills, you could have one easy-to-manage monthly statement and less stress about making multiple payments. Another benefit of consolidating your debt could be a lower monthly payment and a lower interest rate. Of course, there’s no guarantee that your interest rate will be lower since this will depend on factors like your creditworthiness and ability to pay. Plus, if you make your payments on time, consolidating your debt could have a positive effect on your credit score.

It’s important to recognize that debt consolidation won’t magically eliminate your debt and doesn’t guarantee that you won’t accumulate more debt later. Both getting out of and staying out of debt are multi-step processes. If you’re not sure which habits caused you to accumulate so much debt in the first place, consolidating won’t do anything to prevent it from happening again. This could mean taking a look at your spending and saving behaviors and making some changes.

Debt consolidation can, however, be a helpful tool when you’re working with a manageable amount of debt and you combine it with a plan on how to stay out of debt

Why should you consolidate debt with a personal loan?

If you decide to consolidate your debt with a personal loan, it can help you with the following:

Improved Credit Score

While initially causing your credit score to take a hit, a debt consolidation loan could improve it in the long run, especially if you make your monthly payments on time. Your credit score depends partly on your credit card utilization ratio or how much of the credit you’ve used up on your cards compared to how much credit is available to you. By using a personal loan to pay off all of your credit card debt, but still having credit available to you, your utilization ratio will decrease which will positively affect your credit score. There may be a small dip in your credit score at first because applying for a loan will involve a hard credit check. But if you make payments on time and pay off the loan, your credit score could go up.

Better Financial Planning

A personal loan could help you budget your payments well into the future. Most personal loans have fixed interest rates, meaning monthly payments are fixed for the term of the loan.

If you’re curious about how much you could save by consolidating your credit card debt with a Marcus personal loan, check out our personal loans savings calculator. Simply input your current credit card debt and we’ll tell you how much you could be saving.

Learn more.   

How to consolidate debt with a personal loan

Make a list of all of your current outstanding balances, monthly payments, and interest rates.

Determine how much total debt you plan to consolidate and how much you can afford to pay off each month.

Research your options. Banks, credit unions and online lenders are places that offer personal loans. Remember that your goal is to get a lower interest rate and a lower monthly payment than what you currently pay.

Know your credit score because it will help determine what interest rates you qualify for.

Apply. The application process will vary based on which type of financial institution you choose to borrow from. Read more on how to get a loan.

Once you’re approved, you’ll use the lump sum that you receive to pay off all of your existing debt.

Make your monthly payments for your personal loan on time.

Other ways to consolidate debt

There are multiple ways to consolidate your debt, other methods include:

Opening a Balance Transfer Credit Card

balance transfer credit card allows you to consolidate your debt by moving your combined debt over to a new credit card that typically offers a low or 0% promotional interest rate for a given period on balances transfers. However, most of these cards require that you pay a balance transfer fee between 3% to 5% of the total amount that you are moving over to the new account.

Before you get too excited, make sure to read the fine print of the offer. If you cannot pay off your balance within the promotional period, you could end up paying a higher interest rate once the low or zero interest promotional period ends.

You also risk damaging your credit score by using this method because, when you consolidate your debt using a balance transfer credit card, your credit card utilization ratio (the amount of your available credit that you are using) could jump higher.

Negotiating a Debt Settlement

Debt settlement is the process of negotiating with your lenders to pay back just a portion of your debt. What’s the catch? Debt settlement could result in a blow to your credit score that’ll last for 7 years. Ouch. 

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Debt settlement refers to the practice of negotiating with a creditor, usually through a debt settlement company, to pay a portion of your debt in exchange for forgiveness of the remainder of the debt. If you settle a debt, your credit score may take a really bad hit AND the settlement could stay listed on your credit report for 7 to 10 years! The effect on your credit score, along with taxes and fees you could incur, is why it’s best to reserve debt settlement for worst-case scenarios when you’re looking to consolidate your debt.

If you owe money to multiple lenders, you or a debt settlement company will have to go through the settlement process with each of them individually; each debt that you successfully settle could drop your score further.

On top of all that, if you choose to have a debt-settlement company represent you, they may tell you to stop making payments while they negotiate with your creditors. If you stop making payments, the missed payments, fees and interest that go unpaid will be added to your debt. If the debt settlement company fails to settle, you’ll be faced with paying back your original debt, plus all the late and missed payment fees that accumulated during negotiations. Even if they do settle, you’ll still have to pay the settled-upon amount plus applicable taxes, because your settled debt could count as taxable income.

We include this method with caution. Debt settlement should be avoided when possible because if, at first, it sounds too good to be true, that’s because it very well may be.

Just so you know: Other means of debt consolidation include taking out a home equity line of credit (HELOC) or a home equity loan, refinancing your mortgage, or borrowing against a life insurance policy or your retirement savings. 

When is debt consolidation a good idea?

If you’re dealing with a manageable amount of debt but are feeling overwhelmed by the number of creditors that you owe money to, considering debt consolidation could be a good idea.

Debt consolidation may be a good strategy when your debt doesn’t exceed 50% of your income. If you fall into this category, consolidating could help you simplify your debt payments and possibly pay off your debt faster.

When considering debt consolidation, your credit score will play an important role in determining your interest rate and whether it makes financial sense to consolidate.

Let’s say you currently have $15,000 in credit card debt spread over three credit cards, each with 16.99% APR. One credit card has an outstanding balance of $3,000, another of $7,000 and the third of $5,000.

If your credit score is good (660 or above), you could qualify for a Marcus debt consolidation loan with an interest rate that may be lower than the one on your credit cards. For example, assuming you make equal payments on your credit cards and Marcus loan, with a $15,000 loan at 12.99% APR and a 48-month term, you could save $2,305.54 by moving over your debt from your credit cards

You can see what you could save with the Marcus Personal Loan Calculator.

Another benefit to consolidating with a Marcus personal loan is that you’ll know exactly when your debt will be paid off — assuming you’ve all made your payments on time.

By combining debt consolidation with a plan to stay out of debt (e.g., changing your spending behaviors and cutting spending where you can) it can be a big step in the right direction. 

Things to look out for when consolidating debt

Offers that sound too good to be true: for example, be sure to read the terms of the promotional interest rate offered on balance transfer credit cards.

If the interest rate offered by your consolidation option is higher than what you’re currently paying, consolidating probably won’t do you any good.

Is your interest rate fixed or variable?

Make sure you make your payments on time to avoid late fees and are aware of any fees attached to your personal loan.

Debt consolidation could help

We’re not saying debt consolidation is a magic wand for all of your debt problems, but it could be a good place to start.

After you’ve consolidated, you can take steps to try and stay out of debt. Start making your coffee at home and sell that pinball machine, already.

The important thing to remember is that, when your debt feels unmanageable, you have options that can help.

See how Marcus could help

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.