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8 Ways to Consolidate Your Debt

March 5, 2022.

8 Ways to Consolidate Your Debt

There are several ways to approach and find debt relief, but generally speaking, each option is tailored to a particular situation. Don’t blindly assume they will all work for you. Do your research and make an informed decision.

The choice you make for consolidation largely depends on your creditworthiness. Your FICO credit score is not a factor in enrolling in a debt management program, but is a major factor in each of the other choices.

Every strategy requires that you have an income large enough to cover basic expenses (housing, food, transportation) plus the monthly payment to eliminate debt. If you miss a payment, the consolidation process could easily unravel.

Debt Management Program

The goal of a debt management program is to reduce the interest rate on credit card debt and create an affordable monthly payment that eliminates the debt in 3-5 years. Debt management programs are offered by nonprofit credit counseling agencies. The certified counselors from these agencies analyze your financial situation and provide advice on which debt-relief option best solves your problem. The analysis and advice are free.

Pros of Debt Management Programs

  • The reduction in interest rate (often from 25%-30% to around 8%, sometimes lower), should lower your monthly payment and help you pay off debt faster.
  • Fixed monthly payments. You know how much you have to pay each month.
  • This is not a loan. You can withdraw from the program anytime.
  • Enrolling in the program stops calls from debt collection agencies.
  • Your credit counselor can provide educational material and useful suggestions for how to avoid falling into debt.

Cons of Debt Management Programs

  • There is a monthly fee charged for managing your plan.
  • During the payment plan, it is almost always required to close all credit card accounts in the program.
  • If you miss a payment, the lenders can cancel the concessions on interest rate/late payment fees made when you started the program.
  • Your credit score will drop a few points the first six months of the debt management plan, but as long as you consistently make on-time payments, it will recover and even improve by the time you finish the program.

Credit Card Balance Transfers

Transferring multiple credit card balances to a single card with a 0% interest rate is a different form of debt consolidation. It is really do-it-yourself debt consolidation, but it comes with a formidable hurdle – you must have a strong credit score (680 or higher) to qualify. These balance transfer offers typically are made to existing or new customers to build new business.

Pros of Balance Transfers

  • You can pay off your consolidated balances at no interest during the introductory period, saving on interest and allowing you to focus on paying off principal.
  • Balance transfer cards come with a variety of options, including some that offer longer 0% introductory periods.
  • This simplifies the payment process, especially if you were making multiple payments on multiple cards.
  • If you get a new credit card to consolidate debt, it might also offer travel or monetary perks.

Cons of Balance Transfers

  • Balance transfer cards usually are offered to existing or potential customers with high credit scores, 680 or higher. If your credit score is suffering from late payments, this might not be an option for you.
  • If you are using a balance transfer card to pay off multiple credit cards, you must be approved for a high-enough credit limit to handle all the debt.
  • Balance transfer cards typically charge a fee of 3%-5% on the amount of debt shifted. That adds to what you owe.
  • Card companies don’t allow 0% interest on balance transfers between cards they issue themselves.
  • If you fail to pay off what you owe during the introductory period, the remaining balance will revert to the high interest levels normally charged.

Personal Loans

Using personal loans for debt consolidation is another way of turning multiple balances into a single monthly payment. These loans, which don’t require collateral, are available through banks, credit unions and a variety of online lenders. You might even be able to get one from a relative or friend. Personal loans give those with less than sterling credit scores a chance to convert high interest revolving debt into a fixed monthly payment at lower interest rates. A debt consolidation loan calculator can help you see and understand if these loans are right for you.

Pros of Personal Loans

  • A personal loan comes with a fixed interest rate. You’ll know exactly what you have to pay each month and have a payoff date. By contrast, credit card interest rates can vary, based on your payment history.
  • Like credit card debt, personal loan debt is unsecured, so a creditor can’t seize property if you fail to make timely payments.
  • If you have good credit, you should be able to find a much lower interest rate than you’re paying on your credit cards.
  • You can pre-qualify for a loan without committing to it, allowing you to shop for better deals from other lenders before deciding. Prequalifying doesn’t impact your credit rating.
  • In most cases you can pay off the loan before the payoff date without fees or penalties.

Cons of Personal Loans

  • Personal loans are most useful for those who have good credit scores before applying. Those with lower scores, typically less than 660, can expect to pay high interest rates, which can negate the value of consolidating debt with a personal loan. If your credit score is very low, you might not qualify for a loan at all.
  • Lenders often charge origination fees for personal loans, which can use up money that should go to pay down debt.
  • If you use a personal loan to pay off your credit cards, you need to refrain from adding fresh debt to the cards. If you continue to use your credit cards to finance purchases, your debt situation will worsen, which could lead to default.
  • A credit union could be a source for a personal loan, but you must be a member to apply for one of their loans.

Peer-to-Peer Loans

Peer-to-peer lending is another form of personal loans and sometimes a very good option. Peer-to-peer lending connects individuals loaning money directly to borrowers with no middleman (i.e. banks or credit unions) involved. Borrowers go to the lending website, fill out an application and are assigned a risk category based on their financial profile. Investors then offer loan terms and interest rates that the borrower can accept or reject. If the offer is accepted, the money is transferred through the website. The entire process is handled online.

Pros of Peer-to-Peer Lending

Because it’s individuals involved – not institutions – the qualifying standards vary and may swing in your favor if you have a low credit score.

  • There is fierce competition between lenders, so the interest rate you receive could be lower than you expected.
  • You repay the loan at a fixed monthly rate, usually over a 3-5 year period.
  • Most lenders report your payments to credit bureaus so this could help improve your credit score.
  • The entire procedure is conducted online, so you never have to leave your home to complete the process.

Cons of Peer-to-Peer Lending

  • There could be a variety of fees applied to the loan that drive up the cost. Origination fees, for example, could be as low as 1% or as high as 8%.
  • Borrowers are assigned grades – high, low or medium risk – and have no input on how their grade is determined.
  • Multiple investors may want to bid on the loan, making the process stretch for over a week as opposed to a one-day decision from your bank.

Home Equity Loans and Lines of Credit

Using a home equity loan or a HELOC to consolidate credit card debt can substantially lower your monthly interest payments, but it’s a risky strategy. Home loans use your dwelling as collateral. If you can’t afford to repay the loan, the lender can foreclose on your property, possibly costing you your home and whatever equity you have in it.

Home equity loans and HELOCs allow you to borrow against your monetary stake in your home, however lenders will only allow you to borrow a portion of your equity. What you borrow can either be a lump sum (home equity loan) or a credit line (HELOC) that you can use as you wish for a fixed number of years. To consolidate, you can use the equity loan proceeds to pay off credit cards.

Pros of Borrowing Against Your Home

  • Much lower monthly interest rate than what credit card companies charge.
  • Fixed monthly payments. HELOCs often charge interest-only on balances during the draw period, which usually is 10 years. There is no prepayment penalty in most cases.
  • If you have paid off a large portion of your primary mortgage or own a home that has substantially appreciated in value, you could qualify for an equity loan or HELOC that is more than enough to pay off your credit card balances.

Cons of Borrowing Against Your Home

  • You could face foreclosure if you fail to make payments on time and lose your home.
  • To qualify, you need to prove your creditworthiness. This includes proving you have enough income to pay back the money you borrow and an acceptable credit score, usually 680 or higher.
  • Your credit score will help determine how much you can borrow, and the interest rate the lender will offer.
  • Equity loans and HELOCs use underwriting like first mortgages, meaning you will need to pay an application fee, have an appraisal done on your property and cover other application costs. Occasionally lenders will waive these fees. You should ask about them before you apply.

Retirement Loans

If you have a 401(k) retirement plan through your job or past employment, you might be able to borrow from your balance to pay off your credit card debts. Not all employer plans allow this. If yours does, you can borrow $50,000 or half your vested account balance, whichever is less. You have five years to repay the money. Most plans charge interest on the advance, which is usually the prime rate plus 1%.

You could also withdraw, but not borrow, money from an IRA or Roth IRA to pay off balances. If you are younger than 59 ½, you will pay a penalty on IRA withdrawals. You can withdraw from the portion of your Roth IRA that you deposited into the account. In both cases, you will be decreasing your retirement savings.

Pros of Borrowing from Retirement

  • You can pay off high-interest credit card debt with a 401(k) loan. Your future contributions to the account, which are payroll deductions, will pay down the loan.
  • The interest on the loan is paid to you. That means you won’t lose the money; it will revert to your account.
  • You don’t pay loan origination fees since you are borrowing your own money.
  • Borrowing from your retirement funds will not affect your credit.

Cons of Borrowing from Retirement

  • The amount you borrow from the plan won’t benefit from investment gains.
  • If you leave your job, you have until your next tax return to pay back the money or face an early withdrawal penalty if you left your job before you turned 55.

Borrowing from Friends and Family

Borrowing from generous friends or family can be a viable option, depending on the circumstance. The family member willing to loan the money must be in a good financial position, and you must be willing to repay in full and on time. Nobody wants to let down Aunt Clara.

If you choose this kind of loan be sure that the terms and repayment plan are clearly spelled out. Look on it as if you are borrowing from a bank and be sure both parties understand the terms in the family loan agreement.

Pros of Borrowing From Friends and Family

  • You are borrowing from someone you know, someone kind enough to help.
  • In most circumstances, that person will not have a list of eligibility criteria you must meet.
  • Because it is a friend or family member, he or she may be willing to accept an interest rate lower than a bank’s – or, in the most generous case, no interest rate at all.

Cons of Borrowing From Friends and Family

  • This kind of lending is not always easy and can put a strain on family relationships or friendships – especially if you find it difficult to make the promised payments on time.
  • If you don’t pay them back on time or in full, you are hurting someone close to you, personally and financially.

Cash-out Auto Refinance

A cash-out auto refinance loan, also called a cash-out refinance, allows you to refinance your car loan and put cash in your pocket while doing so, The amount you can borrow is based on the equity you have in your car. You could borrow the amount left to pay on the car, plus an additional amount. If you have $8,000 left to pay on the car and $12,000 in equity, it’s conceivable you could be approved to borrow $14,000. That would give you a cash-out amount of $6,000 that you could use to pay off credit card debts. However, you’d have to pay back the $14,000 plus interest.

Pros of Cash-out Auto Refinance

  • This loan allows you to use the equity you have built up in your car.
  • The cash you take out against your equity could be used to pay off burdensome and high-interest credit card debt in one lump sum.
  • You could refinance the original loan to a lower interest rate.

Cons of Cash-out Auto Refinance

  • You still have to repay the loan, and while you’ve added cash to remove credit card debt, you’ll have a larger car loan to repay.
  • Consequences are serious if you don’t repay. Your car may be repossessed. If that happens, you would still have the debt to repay and you’d be without a car.
  • You also run the risk of being upside-down on your car loan – meaning you owe more than the car is worth.
  • Qualifying to receive extra cash will be difficult without a high credit score.

How to Choose the Best Debt Consolidation Option for You

There are so many choices for debt relief that you may find yourself overwhelmed just deciding which one is best. It might be easier to eliminate choices by answering these questions:

  • Do you want to risk losing your house to pay off credit card debt? If not, you can eliminate home equity and HELOC loans.
  • Do you want to risk your retirement savings to pay off credit card debt? If not, eliminate the 401k loan.
  • Do you want to take out a loan to cover credit card bills that you’re already struggling to cover? If not, eliminate the personal loans and peer-to-peer loans.

Some of the options you’re left include a debt management program through a credit counseling agency or a balance transfer card from a company that you don’t already owe money to on your current credit cards.

Bottom line? Choose one that provides peace of mind, that leaves you feeling comfortable that you can afford the payments and eliminates debt.

Then change your spending habits so you don’t have to make this choice again!


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Fay, Bill.  March 5, 2022.  “The 8 Best Debt Consolidation Options”.  Best Ways to Consolidate Debt: What’re Your Options?.

Brozic, J. (2022, April 14) Ways to consolidate credit card debt. Retrieved from

Nicastro, S. and Veling, J. (2021, August 5) 5 Ways to Consolidate Credit Card Debt. Retrieved from

Deckers, E. (2021, September 1) What is cash-out refinancing on an auto loan? Retrieved from

Byers, A. and Lupini, C. (2022, March 26) 7 Ways To Consolidate Credit Card Debt. Retrieved from


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