Consolidating debt: 4 key steps
Debt consolidation starts with understanding how much debt you have and your average interest rate. Then you can figure out an affordable monthly payment and evaluate your debt consolidation options.
1. Calculate how much debt you have
Figuring out how much you owe is a critical first step in consolidating debt. This will provide a baseline against which to compare your options later on, helping you implement a plan that fits your budget and determine how much you can borrow.
2. Determine your average interest rate
Each of your credit card balances and other debts will likely have a different interest rate. Figuring out the average rate, by adding each interest rate and dividing by the number of rates, can help you determine if you can qualify for a lower rate, and therefore save on interest, once you apply and are approved for debt consolidation.
3. Identify an affordable monthly payment
A key part of debt consolidation is an affordable monthly payment. The amount you pay each month should be weighed against your household budget and what you spend on necessities such as food and utilities. You could use an online debt consolidation calculator to estimate what the monthly payments could be on a personal loan.
4. Evaluate your debt consolidation options
There are many options for debt consolidation. For example, you may consider a debt consolidation loan or a home equity loan. Each method has advantages and disadvantages, so carefully review the details of each to find the best option for you.
Pros and cons of consolidating debt: Is it right for you?
At a high level, debt consolidation can be the right choice for responsible borrowers with high-interest debt if it lowers their average interest rate. It can also be helpful if you want a way to simplify the payment process. However, if you have a small amount of debt that can be paid off quickly, or your interest rates are relatively low, there is little reason to consider consolidation.
Debt consolidation can be a powerful tool, but it isn’t necessarily right for everyone. It’s important to consider the advantages and potential drawbacks before applying.
Debt consolidation advantages
Here are some of the advantages of debt consolidation:
- Potentially lower interest rates: Interest rates may vary across the loans you owe money on. Consolidating debts into 1 payment means you’ll have a single interest rate, which could potentially save you money in the long run if that interest rate is lower than the average interest rate of your previous loans.
- A single monthly payment: Paying off multiple loans with different interest rates can be inefficient and confusing. Consolidating debt into 1 monthly payment not only simplifies the process but may also allow you to plan more effectively since you’ll know when the debt will be paid off.
- Faster debt payoff: By consolidating debt into 1 payment with an interest rate lower than the average interest rate on all your loans, you could reduce the total amount you owe and help to pay it off sooner. The faster you pay off your debt, the less interest you will pay over time.
- Credit improvement: Debt consolidation could lower your credit utilization ratio, which measures how much available credit you use. It could also improve your payment history if you consistently make on-time monthly payments. Both factors are crucial in improving your credit score.
Debt consolidation drawbacks
Debt consolidation can come with certain drawbacks:
- You must meet certain standards to qualify: Lenders each set their own credit and income requirements for loan approval. If you don’t meet a lender’s credit qualifications, your options may be more limited.
- You may pay fees: Some debt consolidation loans charge origination fees, which will add to your total debt cost. There can also be other fees, such as late payment fees and prepayment penalties, depending on the lender. The Citi® Personal Loan has no fees, including no origination fee, no prepayment penalty, no late fees, and no hidden fees.
- Missing payments could lead to credit damage: While on-time payments can help to improve your credit score, missing a debt consolidation loan payment may result in a credit score dip.
Who can help me consolidate my debt?
If you decide to consolidate your debt with a personal loan, you could research banks, online lenders, and credit unions to find a loan that meets your needs. For example, Citi® offers flexible, no-fee personal loans to qualified applicants. If you think you could benefit from a Citi® Personal Loan, apply online today.
FAQs: how to consolidate debt
How does debt consolidation affect your credit score?
Consolidating debt can impact your credit in a few different ways. While the hard credit inquiry and lowered credit account age can lead to a credit score dip, paying off your debt and making on-time payments can lead to a credit score increase.
What are the risks of debt consolidation?
If you fail to repay your monthly payment on a debt consolidation loan, you risk defaulting on the loan. That means the lender could charge a penalty, such as a late fee. Your credit score will also be damaged, which may make it harder to apply for and get approved for loans in the future.
It is also important to be aware of potential fees. Debt consolidation loans may charge origination fees, though this isn’t the case across the board.
Does debt consolidation work on a limited income?
Debt consolidation can be a good option for people on limited incomes. Repaying the debt should still be beneficial as long as the borrower has an affordable monthly payment, can find a low-interest debt consolidation loan, and doesn’t take on additional debt.
What type of debts or loans can I consolidate?
Several types of debt can be consolidated into an unsecured personal loan, such as credit card debt. Keep in mind that each lender will have its own limitations as to how funds may be used.
Do I have to consolidate all of my debt?
No. Debt consolidation tends to be preferable when you have high-interest debt. A primary goal of debt consolidation is to lower your interest rate, so if you have lower-interest rate debt, you may choose to exclude that from debt consolidation.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
