Managing Your Money: Strategies to Consolidate Multiple Debts
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Debt consolidation is when an individual attains one large loan and pays off several smaller debts. Some borrowers can benefit from a debt consolidation loan, which could include a lower interest rate or a monthly payout — or in some cases, both.
It can be a great strategy to consolidate credit card debt, medical debt, student loans, payday loans and other liabilities. There are plenty of good resources and tools available to help people consolidate their debt, reduce stress and move toward financial freedom.
Consumer Debt in the US
The total consumer debt in the U.S. has continued to increase over the past two decades. Easy access to credit cards and other financial products, including peer-to-peer lending, has contributed to this rise in debt levels.
The total consumer debt is about $14.9 trillion, including mortgages, auto loans, credit cards and student loans.
Mortgage and student loan debts were at an all-time high at $10.3 trillion and $1.6 trillion, respectively, in 2020.
At the end of 2020, the average American carries an average of $5,897 in credit card debt.
Source: Experian (Average U.S. Consumer Debt Reaches New Record in 2020 and State of Credit 2020: Consumer Credit During COVID-19)
How to Consolidate Debt

Debt consolidation can help you reduce your interest charges, monthly payout and improve your credit profile. There are a few reasons you may take a debt consolidation loan.
- You have multiple debts with different interest rates and payment schedules.
- You want to simplify your life by making one scheduled payment every month at a similar (or lower) interest rate.
- You have multiple high-interest debts and want to reorganize your debt and pay a lower rate of interest.
5 Options to Manage Your Debt
If you have loans, you can consolidate your debt through two means: Secured loans and unsecured loans.
- A secured loan is one where you put an asset of yours as collateral — for example, a house or an automobile.
- An unsecured loan is one where you borrow money without any security for the loan. These loans are tougher to get sanctioned compared to secured loans. They also come with a higher interest rate.
Here are five different options to start consolidating your debt:
Debt consolidation loans
These are unsecured loans where you total up the amount of debt you have and borrow the same amount from a traditional bank, a credit union or a peer-to-peer lending service. Once the loan is transferred into your bank account, you repay all your debt in one shot and then pay down the single loan.
For example, if you have multiple credit card debts with interest rates, say, between 15–25%, you can take one loan at a lesser interest rate and pay off all your debts. To qualify for a debt consolidation loan, you will need to have a qualifying credit score, a good borrowing and payment history, and income proof that you can pay off the debt consolidation loan.
Consider looking into a free credit report to see if you qualify. You can also discuss options with your bank or credit union.
Balance transfer credit cards
A balance transfer credit card allows you to transfer all your debt onto one credit card. You need to make sure the credit card has a sufficient limit to transfer all the debt and the lowest interest rate. Some credit card companies waive off the balance transfer charges — generally between 3–5% of the transfer. Some companies also have promotional offers where they don’t charge any interest on the transferred amount for 12–18 months. You can use this ‘free’ period to pay off as much of your debt as you can.
To qualify for a balance transfer credit card, you may need a credit score of at least 670. It may help to improve your credit score> prior to applying.
Retirement accounts (401(k) loan, savings and Traditional/Roth)
You can use funds from your retirement accounts to pay off your debt. Keep in mind withdrawing early before the age of 59.5 years will result in a 10% tax penalty. Withdrawing from retirement accounts may also affect your retirement savings and prevent your money from compounding over time.
Home equity loan
If you have a home you can put up as equity, you could take advantage of a low-interest rate — as low as 4%. However, you have to keep in mind that you may lose your most valuable asset if you default on multiple payments on a home equity loan.
Student loans
You can consolidate student loans. One way is to opt for federal loan consolidation, such as the Direct Consolidation Loan, which combines multiple federal loans into one loan. You can choose to pay a lower amount every month, but the loan tenure increases, meaning interest payments will increase. Federal loan protection and debt forgiveness programs could also help give you relief.
Another way is to refinance your student loans, which is combining federal and private loans into one loan. You can get a reduced interest rate on this loan if you have a good credit score but you can’t access federal loan protection and debt forgiveness programs. If you want to consolidate private loans, you may need a credit score of 680 or higher.
Requirements You Need to Consolidate
You need to fulfill two criteria to qualify for debt consolidation: Sufficient income and good credit history. As long as you can prove to the lender you have enough income to repay your loans through an employment letter and/or bank statements, have letters from your creditors and at least the last two statements of your credit cards and debts.
The lender sanctioning the debt consolidation loan might decide the order in which debts have to be paid. If not, it’s best to pay off the highest-interest debt.
Is Debt Consolidation a Good Idea?

Debt consolidation can help you reduce financial stress and manage your debt easier. Without debt, you can consider other financial avenues to grow your money, such as contributing to retirement plans and investing in bonds and stocks.
Advantages of Consolidating Your Debt
Here are three advantages to consolidate your debt.
Easy to pay with one payment
You can consolidate all your debt into one loan and only make one monthly payment, generally at a lower interest rate.
Credit implications
When you take out one consolidated loan and make regular payments, your credit utilization ratio starts to reduce, thus improving your credit score.
Be debt-free sooner
You can become debt-free sooner, and it reduces the level of stress you may experience.
Persona Snapshot: James, 27
Take, for instance, a 27-year-old named James who has a credit score of 740 and $12,400 in credit card debt. He qualifies for a balance transfer credit card with 0% for 12 months. After a year, the interest rate is 9%. If he pays off $800 every month during that year at 0%, he will have $2,800 left to pay. If he continues to pay off $800 every month at the 9% interest rate, he will be able to pay off the remaining amount and the interest in about four months. Then James will be debt-free in a little under two years.
Disadvantages to Consolidating Your Debt
While debt consolidation can help you be debt-free sooner, you may encounter a few drawbacks. Here are three disadvantages.
Slippery slope
If you consolidate your debt into one loan or card but continue to collect additional debt on your credit cards, your debt could compound.
Collateral in danger
If you consolidate your debt against collateral — let’s say a home equity loan, and you miss out on multiple payments — there is a risk a lender could possess your collateral.
Higher loan payment
If you have a bad credit score and decide to pay a lower monthly payment, you might have to accept a longer tenure. Accepting a longer tenure could result in paying more interest over time.
Persona Snapshot: Nina, 33
For example, 33-year-old Nina, who has debts of $15,000, gets a loan at an interest rate of 17%. Because her credit score isn’t that good, she can’t pay over $550 a month. She extends her tenure to three years. Now she can pay $535 a month for 36 months for a total payment of $19,252. Over time, her total interest is about $4,252.
Other Options You Can Do
Sometimes, debt consolidation might not be the best option for some people. If it is not, take a look at these three other alternatives.
Working with a creditor directly
You and a trusted lender can settle debts at a discount. You can negotiate with your lender and agree to a one-time payment. Sometimes, you may even have the opportunity to forgive part of your debts and pay less. However, this may potentially impact your credit history and credit score negatively. You may pay a fee if you go this route.
Debt settlement agencies
You can use debt settlement agencies to help you deal with creditors. There may be high costs and fees associated with these agencies. However, beware of fraud and scams. If you encounter fraud, report it to the Federal Trade Commission.
Bankruptcy
Bankruptcy is an alternative to debt consolidation. It is a legal process where a judge can discharge part, or all the debt, depending on what you have petitioned for in court.
Expert Insight on Debt Relief Companies and Approaches
MoneyGeek spoke with financial professionals on ways to help you consolidate your debt.
- What are your thoughts on debt relief companies? Are they a good option?
- Once you have the money, how should you approach debt consolidation?

Founder and Managing Partner, G&H Financial Group

SVP of AltLINE Sobanco
Additional Resources
You can find several resources below to help you manage your debt, lower your interest rate on credit card debt and reduce your student loans.
- Servicemembers Civil Relief Act (SCRA): If you are an active member of the Armed Forces, SCRA can help you qualify for a lower interest rate on credit card debt.
- National Foundation for Credit Counselling: NFCC is a nonprofit organization that can connect you to a member agency and helps you find a debt solution.
- Financial Counseling Association of America: FCAA is a nonprofit with member agencies that assist consumers annually. It offers financial counseling services and debt management plans for the repayment of unsecured debts.
- The Federal Trade Commission’s How To Get Out of Debt: This FTC page teaches you how to exercise your rights under the Fair Debt Collection Practices Act and recognize debt-related scams and frauds.
- Studentaid.gov: You can have your federal student loans forgiven, canceled or discharged. Learn more about the types of forgiveness and whether you qualify due to your job or other circumstances.
- The Public Service Loan Forgiveness (PSLF) program: PSLF can help you reduce student loans. If you are employed by a U.S. federal, state, local or tribal government or not-for-profit organization, you might be eligible for it.
About Aditya Raghunath

sources
- Experian. "Average U.S. Consumer Debt Reaches New Record in 2020." Accessed April 28, 2021.
- Experian. "State of Credit 2020: Consumer Credit During COVID-19." Accessed April 28, 2021.
- Federal Trade Commission. "Settling Credit Card Debt." Accessed May 5, 2023.