Managing Your Money: Strategies to Consolidate Multiple Debts

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.

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.

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.

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.