What Is Debt Consolidation and How to Consolidate Your Debt

By Sharita M. Humphrey
Published on: 05/09/2022

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Debt consolidation is the process of bringing together many debts into a single payment.[1] Each person’s debt situation is unique, but if you have several high-interest obligations like credit card payments and find yourself struggling to pay even the minimum each month, this might be an option for you.

Should You Consider Debt Consolidation?

If you’re looking for ways to be more responsible with your money and avoid relying on credit cards, debt consolidation is a strategy that can help you get started. You’ll be able to manage your debt in one monthly payment rather than having to keep track of multiple payments on different due dates.[1]

Here are some of the indicators that debt consolidation might be the right option for you:[1]

  • When your monthly income is more than your monthly costs.
  • When you qualify for a credit card with a 0% interest rate.
  • When you can add another monthly payment to your household budget.
  • When you can afford a lump payment that actually lowers the principal balance, rather than just satisfying the minimum payment required.

How to Consolidate Your Debt

Debt consolidation may be beneficial as it can lower your interest rate and monthly payment to a more affordable rate. Here are the steps to take:[1]

1. Calculate Your Debt

The first step in debt consolidation is determining how much you owe. If you decide to combine your debts and use a loan or apply for a 0% credit card to pay them off, you will need to know how much to borrow.

2. Determine Your Average Interest Rate

If you have more than one credit card you may have differing interest rates that will need to be averaged to establish the weighted average interest rate you are paying on multiple credit cards. There are online calculators that can help you perform the calculation. Your weighted average interest rate will provide a benchmark for the lender to beat.

3. Determine Affordability of the Monthly Payment

Review your monthly budget and your spending on needs such as food, rent, utilities, and transportation. Is there any money left over after making those payments to pay off credit cards or a loan? Your monthly consolidation payment must be affordable.

4. Consider Your Consolidation Options

This next step will require some research, but here are some options to choose from:[1]

  • Debt management plan
  • Personal loan
  • Credit card balance transfer
  • Home equity
  • Retirement accounts

Types of Debt Consolidation

A debt management plan, a home equity loan and borrowing from a savings/retirement account are some of the ways you may consolidate your debt. The option you choose should be based on what’s right for your budget and time frame. Also, remember to do your own research before you decide which method to move forward with. See the options below:[1]

1. Debt Management Plan

The purpose of a debt management plan is to potentially reduce your interest rate, lower your monthly payments, and eradicate your debt in 3-5 years.[1] These plans are offered by nonprofit credit counseling organizations, who may negotiate interest rate reductions from credit card issuers to arrive at a reasonable monthly payment for the consumer. It’s important to ask the counseling agency what their processes and procedures are so that you have a clear understanding of how they will work on your behalf with your creditors.

2. Personal Loan

This type of consolidation loan is typically provided by a bank, credit union, peer-to-peer lender, or even a family member or friend. Personal loans can be unsecured, which means the borrower is not required to provide any collateral. This may result in a higher interest rate and less money for the loan. With that being said, a good credit score may help lower the interest rate.

3. Credit Card Balance Transfer

Some credit card issuers provide a very appealing balance transfer rate, but you will have to see if it’s available to you. These cards allow you to transfer your balance from one card to another and make payments at 0% interest for a limited time (usually 12-18 months).[1] Typically, you’ll have to pay a transfer fee of 3% to 5% of the transferred sum. This cost will be applied to your balance. If you choose this route, make sure you can commit to paying the balance before the end of the promotional term or you may find yourself facing another high-interest payment.

4. Home Equity Loan

If you have equity in your home—meaning you owe less than the market value of the property— you may be able to use that equity to consolidate your debts. A bank may allow you to borrow up to 80% of your equity. For example, if you have $50,000 in equity, you may borrow up to $40,000 to pay off credit cards.[1] Because you are providing collateral, the interest rate you pay may be lower than the interest rate on an unsecured credit card.

5. Retirement/Savings Accounts

If your employer provides you with a 401k retirement account, you may have the option to take out a loan against this plan or tap into your savings to pay off your debt. The great thing about a 401k loan is that you’re essentially borrowing your own money so the rates may be low and there is no credit check involved. On the flip side, if you withdraw money from your retirement account before the age of 59 and a half, you may be penalized. You may also be taxed on this, so make sure to consider your options before going down this route.


Consolidation can be a great way to help you pay off your debt and get a fresh start. When looking for debt consolidation loans, do your homework and read the fine print to ensure you understand the costs and terms associated. Before you take on a loan, make sure you can afford the monthly installments. Missing a payment may result in late fees and your credit score may take a hit. Now’s the time to work on breaking bad spending habits and lay a solid financial foundation so you can avoid accumulating more debt and begin your path to financial freedom.


  1. Debt.org. “Debt Consolidation.” https://www.debt.org/consolidation/

About the Author

Sharita Humphrey is an award-winning finance expert and money mentor. Once broke and homeless, Sharita knows first-hand that financial freedom has a blueprint. As a former state government auditor and tax representative, Sharita left the security of a government job to pursue her dream of helping individuals change the financial trajectories of their lives and businesses.

As a certified financial educator, Sharita helps entrepreneurs learn the basics and intricacies of creating, managing, and growing their businesses. Sharita was named the 2020 National Financial Educator of the Year for her work within her local community and across the country. Sharita recently expanded her educational services internationally, collaborating with the U.S. Embassy in Namibia to educate entrepreneurs in Africa.

Sharita is a media maven, providing regular editorial contributions to entrepreneurial publications and organizations including the blog for America’s Small Business Development Centers. She has been featured in top-tier media including CNBC, iHeartMedia, Forbes, Yahoo! Finance, and BBC World News.

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Written on May 9, 2022
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