If you have multiple debts, such as credit cards, personal loans, or payday loans, you may be wondering if there is a way to simplify your payments and save money on interest. One possible solution is debt consolidation, which involves taking out a new loan or a balance transfer credit card to pay off your existing debts. But is debt consolidation a good idea for you? Here are some pros and cons to consider before you decide.
Pros of debt consolidation
- Lower interest rate. Depending on your credit score and the type of debt you have, you may be able to get a lower interest rate by consolidating your debt. This can help you save money on interest and pay off your debt faster.
- Single monthly payment. Instead of juggling multiple bills with different due dates, interest rates, and minimum payments, you can simplify your finances by making one payment each month to your new loan or credit card. This can also help you avoid late fees and penalties.
- Improved credit score. By paying off your high-interest debt, you can reduce your credit utilization ratio, which is the amount of credit you use compared to your available credit limit. This can boost your credit score over time. Also, by making on-time payments to your new loan or credit card, you can establish a positive payment history, which is another important factor for your credit score.
Cons of debt consolidation
- Fees and charges. Depending on the type of debt consolidation you choose, you may have to pay some fees and charges, such as origination fees, balance transfer fees, annual fees, or prepayment penalties. These can reduce the amount of money you save by consolidating your debt.
- Longer repayment term. If you opt for a lower monthly payment by extending your repayment term, you may end up paying more interest over the life of the loan or credit card. This can negate the benefits of debt consolidation and make it harder to get out of debt.
- Potential for more debt. If you consolidate your debt but don’t address the underlying issues that caused you to accumulate debt in the first place, such as overspending or lack of budgeting, you may find yourself in more debt down the road. This can happen if you use your newly freed-up credit to make more purchases or take out more loans.
How to consolidate your debt
There are two main ways to consolidate your debt: a debt consolidation loan or a balance transfer credit card. The best option for you will depend on your credit score, your debt amount, and your financial goals.
Debt consolidation loan
A debt consolidation loan is a personal loan that you use to pay off your existing debts. You can get a debt consolidation loan from an online lender, a bank, or a credit union. The interest rate, loan amount, and repayment term will vary depending on your creditworthiness and the lender’s criteria. To qualify for a debt consolidation loan, you will need a good or excellent credit score (690 or higher), a steady income, and a low debt-to-income ratio.
Here are some of the best debt consolidation loans of February 2024, according to NerdWallet:
| Lender | APR range | Loan amount | Loan term | Minimum credit score |
|---|---|---|---|---|
| SoFi | 5.99% – 18.85% | $5,000 – $100,000 | 2 to 7 years | 680 |
| Happy Money | 5.99% – 25.05% | $10,000 – $35,000 | 2 to 5 years | 640 |
| LightStream | 2.49% – 19.99% | $5,000 – $100,000 | 2 to 12 years | 660 |
| Universal Credit | 5.94% – 35.97% | $1,000 – $50,000 | 3 to 5 years | None |
| Best Egg | 5.99% – 29.99% | $2,000 – $35,000 | 3 or 5 years | 640 |
| Discover | 6.99% – 24.99% | $2,500 – $35,000 | 3 to 7 years | 660 |
Balance transfer credit card
A balance transfer credit card is a credit card that offers a low or zero interest rate for a limited period of time, usually 6 to 24 months, on balances transferred from other credit cards or loans. You can use a balance transfer credit card to pay off your high-interest debt and save money on interest. However, you will need a good or excellent credit score (690 or higher) to qualify for a balance transfer credit card, and you will have to pay a balance transfer fee, typically 3% to 5% of the transferred amount.
Here are some of the best balance transfer credit cards of February 2024, according to NerdWallet:
| Card | Intro APR | Regular APR | Balance transfer fee | Annual fee |
|---|---|---|---|---|
| Citi® Diamond Preferred® Card | 0% for 18 months | 13.74% – 23.74% | 3% or $5, whichever is greater | $0 |
| U.S. Bank Visa® Platinum Card | 0% for 20 months | 14.49% – 24.49% | 3% or $5, whichever is greater | $0 |
| Citi® Double Cash Card | 0% for 18 months | 13.99% – 23.99% | 3% or $5, whichever is greater | $0 |
| Wells Fargo Platinum card | 0% for 18 months | 16.49% – 24.49% | 3% for first 120 days, then 5% | $0 |
| Bank of America® Customized Cash Rewards credit card | 0% for 15 months | 13.99% – 23.99% | 3% or $10, whichever is greater | $0 |
Should you consolidate your debt?
Debt consolidation can be a smart move if you can get a lower interest rate than what you’re currently paying, and if you can afford the monthly payment and stick to a budget. Debt consolidation can help you simplify your finances, save money on interest, and pay off your debt faster. However, debt consolidation is not a quick fix for severe debt problems, and it may not be suitable for everyone. You should weigh the pros and cons of debt consolidation carefully and compare different options before you decide.
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