What is Debt Consolidation?
Debt consolidation is a strategy to help make your high-interest debts more manageable, more affordable, and easier to pay off.
Consolidating your debt essentially involves three steps:
- Applying for a Signature Loan
- Using the funds from the loan to pay off your high-interest debts
- Paying off a Signature Loan
Since signature loans typically have a lower interest rate than credit card debt, you can potentially save money by paying more towards the principal balance each month, less towards interest.
Managing multiple sources of high-interest debt can be frustrating and overwhelming. Debt consolidation simplifies paying off your debt by giving you one simple loan, with one low rate, and one easy payment.
When You Should Consider Consolidating
If you are trying to manage a moderate, but not severe, amount of debt, and want to simplify your payments each month, debt consolidation might be right for you.
Benefits of debt consolidation include:
- A lower-interest rate: you will likely pay less in interest and more towards your principal balance.
- A locked-in rate: your payments will be the same each month for the life of the loan, making it easier to budget and plan.
- Lower monthly payments: the extra funds each month could be put towards savings, travel, or retirement planning.
- Repayment timeline: as long as you make the payments each month, you'll know exactly when the debt will be paid off.
Things to Consider Before Consolidating
While debt consolidation is a sound strategy in certain circumstances, it may not always be the right choice for paying down your debts.
We believe you should always make informed financial decisions that best benefit your financial needs and goals.
Here are some things to consider before you decide to consolidate your debt.
Make sure you have a plan to pay off the debt
Check your monthly budget and ask yourself:
- Will the new monthly payment be realistically affordable?
- Will you rely on your new balance-free credit cards for purchases and expenses, and rack up more debt?
- FICO® (a company central to the calculation of credit scores) is changing how they treat personal loans. If you use a personal loan to pay off credit card debt, but then amass more debt by using those credit cards, there may be negative consequences for your credit score.
Assess the level of your debt
- Debt consolidation is meant for moderate debt: debt that can be realistically paid off in 3-5 years.
- If you can pay off your debt in 6 months to 1 year, debt consolidation may not right for you.
Is your credit score good enough for a low rate?
- If your debt hurt your credit score, you may not be able to qualify for a low rate on a signature loan. If the rate you qualify for isn't lower than your current loan(s), debt consolidation may not make sense.
- If you have high balances, but always pay at least the minimum on time, your credit score is probably high enough to qualify for a lower interest rate. Check your FICO® Score for free in Online & Mobile Banking.
Do you qualify for an introductory 0% APR credit card?
Certain credit cards offer an introductory 0% APR for balance transfers. This allows you to transfer your debt to one card and pay zero interest for a limited time.
There are some things you should consider:
- Your debt may exceed the limit, or not be eligible for transfer at all.
- Card may charge a balance transfer fee (usually 3% of the total amount transferred).
- The 0% APR introductory rate will change. This typically happens after 12-24 months, and the new APR is generally much higher than that of a signature loan.
- If you don't think you can pay off the debt during the introductory period, you might want to consider other options.
Debt consolidation is a sound strategy for people with moderate (but not severe) debt, who are looking to simplify and streamline their payment structures. Benefits of debt consolidation can include: a locked-in, lower interest rate, lower monthly payments, and a repayment timeline.
Debt consolidation is not a good option for people with an unmanageable amount of debt, or for people who do not have a realistic monthly budget in place.