Reduce debt stress: How (and when) to consolidate debt

The uncertainty of 2020 has taken its toll. But amidst a turbulent year, many Americans are finding ways to reduce debt stress.

A recent study showed that, since the COVID-19 pandemic, debt is down and credit scores are up on average.^{Disclosure 1} Many people have become more wary of debt, so they’re accruing less of it, and those who can afford to are taking the opportunity to pay down their existing debt. 

Is debt consolidation right for you?

Even though debt consolidation can provide a boost for many, that doesn’t mean it’s for everyone. If you’re on track to pay off your debt within the next year or so, consider other payoff strategies, like the "snowball” or “avalanche” approaches.

If your debt is less than 40% of your gross income and your credit is good enough to get you a 0% balance transfer or low-interest debt consolidation loan, consolidation could provide some benefits.

For instance, if you have several credit cards with interest rates in the 18% – 24% range, but you make regular on-time payments and you have a good credit score, you may qualify for a debt consolidation loan in the 7% – 10% interest range.

On the other end of the spectrum, if your total debt is more than half of your income, consolidation may not be the best option. Consolidating too much debt could land you with a large monthly payment with less flexibility than your current situation, but it depends on the type of debt you’re carrying and your unique circumstances. Consider seeking help from a credit counseling agency if you have a high debt load and are unsure about what to do.

What kinds of debt can be consolidated?

While credit card debt is one of the most common forms of debt that people choose to consolidate, other forms of unsecured debt are also eligible, such as medical debt, personal loans, store cards, gas cards, and payday loans. Student loan debt is also often eligible for consolidation, though it often requires a specialized program to do so—and consolidating federal student loans may void certain benefits, like forgiveness options. 

The first step to a new beginning

In a way, debt consolidation can feel like a chance to reset your finances. But it’s important to remember that, while debt consolidation offers short-term benefits, it may not be your best long-term solution. Before applying for a consolidation loan, take the time to review your balances, interest rates, and credit score—then run the math and consult with an expert to see if you’re saving in the long run versus prolonging your debt payoff journey.

Ideally, we should all try to avoid high-interest debt by developing a plan to help us spend within our means through budgeting.

Learning to manage your debt is a step forward on the path to financial confidence.