How to Consolidate Debt

Every year, many Americans consider rolling all of their outstanding debts into one manageable monthly payment, usually with a lower interest rate. If borrowers can consolidate their debts to a low-interest loan, they can pay off their debt faster while simplifying the payment process.

Consolidating debt can also save you money over time if you consolidate higher-interest debts into a single lower interest loan. In many cases, it’s a sensible financial strategy that can make paying off debt more manageable and affordable.

What is Debt Consolidation and How Does it Work?

Debt consolidation can help simplify your monthly payments and reduce your overall debt burden, but it’s important to understand how consolidating debt works before you take this step.

The main goal of debt consolidation is to lower your interest rate and simplify the payment process. Once you’ve been approved for a personal loan, you can consolidate your high interest debt, including your multiple credit card   balances with varying interest rates, into a single monthly payment. Paying off several debts in one amount is sometimes simpler than juggling various balances and interest rates.

Steps for debt consolidation

Calculate how much debt you have

Figuring out how much you owe is a critical first step in consolidating debt. This will allow you to implement a plan that fits your budget and helps you determine how much you’re able to borrow.

Determine your average interest rate

Each of your credit card balances and other debts will likely have a different interest rate. Before you consolidate your debt, be sure to use an online interest rate calculator to determine how high your average interest rate is.

Identify an affordable monthly payment

An affordable monthly payment is the core of debt consolidation. The amount you pay each month should be weighed against your household budget as well as what you spend on necessities such as food and utilities.

Evaluate your debt consolidation options

There are many options for debt consolidation. You may consider a debt consolidation loan or you could opt for a debt management plan.  Each debt consolidation method has advantages and disadvantages, so review the details of each before choosing the option that works best for you.

Advantages of Debt Consolidation

Here are some of the advantages of debt consolidation:

  1. Potentially lower interest rates: Interest rates may vary across the loans you owe money on. Consolidating debts into one payment means you’ll have one 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.
  2. One monthly payment: Paying off multiple loans with different interest rates can be inefficient and confusing. Consolidating debt into one monthly payment not only simplifies the process, but it also allows you to plan more effectively since you’ll know in general when the debt will be paid off.
  3. Faster debt payoff: Consolidating debt into one payment could reduce the amount you owe and allow you to pay it off sooner. The faster you pay off your debt, the less interest you will have to pay back over time.
  4. Credit score improvement: Debt consolidation could lower your credit utilization ratio, which is a measure of how much of your available credit you’re using. It could also improve your payment history if you consistently make your monthly payments. Both of these factors are crucial in determining your credit score.

Frequently Asked Questions

How does debt consolidation affect your credit score?

Consolidating debt impacts your credit score in a few different ways. As stated above, paying off your debt after consolidating could improve your score. But in the interim, debt consolidation could negatively impact your score.

Applying for a loan launches a hard inquiry from your lender into your credit file, which could lower your score a few points. Additionally, opening a new credit account is viewed as a risk and lowers your average account age, which could lower scores for a while.

Is debt consolidation the right choice?

Debt consolidation can be the right choice for responsible borrowers with high-interest debt. It usually lowers your interest rate and simplifies the payment process with monthly installments.

However, if you have a small amount of debt that can be paid off quickly, there is little reason to consider consolidation. Debt consolidation is probably the wrong choice if you don’t plan to improve your spending habits.

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, which means lender could charge penalty fees. Your credit score will also be damaged, making it harder to take on loans in the future.

It is also important to keep an eye on fees. Debt consolidation loans may charge origination fees of up to 8% of the loan amount.

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.

There are certainly risks for people on a limited income, especially if that income is not stable. Therefore, it is crucial to ensure your monthly payment is reasonable for your income.  

What type of debts or loans can I consolidate?

Several types of debt can be consolidated. Through what’s known as “unsecured” debt consolidation, which is the type of consolidation you can perform with an unsecured personal loan, you can consolidate things like credit card debt, other personal loans, and unpaid medical bills. 

Do I have to consolidate all my debt?

Debt consolidation is probably most preferable when you have high-interest debt. One of the main goals of debt consolidation is to lower your interest rate. If you want to pay off a debt which has a lower average interest rate consolidating the debt may not be your best option.

Who can help me consolidate my debt?

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.


Disclosure: 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.

Additional Resources

  • Start your personal loan application now!

  • Learn how FICO® Scores are determined, why they matter and more.

  • Review financial terms & definitions to help you better understand credit & finances.