Consolidating your debts—taking out a new loan or credit line to pay off multiple debts—can offer several potential benefits:
- You’ll have fewer monthly bills to manage.
- Your monthly payment may decrease.
- You might save money by lowering your interest rate.
- Moving debt from revolving to installment accounts may raise your credit scores.
- Moving debt from revolving to installment accounts may make it easier to stick to a repayment schedule.
Low-cost debt consolidation options can include a balance transfer credit card that offers a zero-percent interest rate on transferred balances, or a personal loan that has a lower rate than your current debts.
If you can qualify for a low-rate loan, credit card, or credit line, you may be able to receive multiple benefits.
However, if you’re struggling with paying down debts, and particularly if you have a poor credit score or modest income, it can be difficult to get a balance transfer credit card with a high credit limit or a low-rate loan.
1. Consider higher-cost debt consolidation options
You may have several alternative options if you don’t get approved for a low-cost debt consolidation loan or credit line. One could be taking out a loan that doesn’t save you money but still makes it easier to manage your finances.
For example, say you get approved for a loan with a similar interest rate to what you currently pay but a much longer repayment term. Your monthly payments could decrease, but you’ll wind up paying more in interest in the long run. This may even be the case if you qualify for a lower-rate loan. Or, you could wind up paying much more interest with a higher-rate loan.
If you’ve already taken steps to reign in your budget and you’re still struggling, lowering your monthly bills might be your top-priority goal and paying more in interest overall could be a worthwhile tradeoff. However, calculate the interest costs of each option to understand how much you’ll pay overall.
2. Put off consolidation while focusing on your financial health
Another option could be to continue paying down your debts while you work on improving your creditworthiness, and then trying again later. For example, you could:
Lower your debt-to-income ratio
Your debt-to-income ratio (DTI) can be an important factor in getting approved for a new loan or line of credit. Increasing your income and lowering your required monthly payments could help you lower your DTI. Focus on paying off low-balance accounts to clear away those monthly obligations.
Raise your credit scores
Learn about what influences your credit scores and try to take steps to increase your scores. If you have late payments or other derogatory marks, their impact may decrease over time, and this may partially be a waiting game. However, you could also try to make extra payments on revolving credit accounts, which could quickly lower your utilization rate and help your scores.
Try to get pre-approved before applying again
Each credit card and personal loan application could lead to a hard inquiry on one of your credit reports. Multiple hard inquiries could hurt your credit scores and ability to qualify for a new account. Even one inquiry can have an impact on your scores, although it’s generally very small.
3. Get expert help with a debt management plan
A third option is to work with a nonprofit credit counseling organization. If you sign up for a debt management plan (DMP), you’ll make just one monthly payment to the credit counseling organization, which will then pay your creditors on your behalf. Although your loans aren’t technically consolidated, you still get the benefit of only having to make one monthly payment.
There may be a start-up and monthly fee for a DMP, although some applicants are eligible for reduced or waived fees. Additionally, the credit counselors may be able to negotiate more manageable terms with your creditors, potentially even lowering your interest rate or monthly payment amounts.