Six Ways to Consolidate Debt (and Their Pros and Cons)

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The following article is presented for informational purposes only.

If you’ve built up a significant amount of credit card debt, you’re probably tired of making the minimum payments on several cards every month and not seeing any reduction in your total debt. If this is the case, you may be considering debt consolidation to pay off your high-interest cards and reduce the number of payments you make each month.

There are several different ways of consolidating, and which one you choose will depend on your situation. There isn’t a “best” option that fits all situations, so you’ll need to decide what works best for you.

Unsecured Debt Loan

You can take out a loan from a bank, credit union, or online lender, but your current credit score will be a factor in determining your eligibility and interest rate.

Pros: Your interest rate will most likely be lower and you’ll have more time to pay off your debt.

Cons: Some lenders charge a fee for setting up your loan, which could cost you more, and if your credit is poor, you won’t be approved for a lower interest rate.

If you have good credit and don’t have more than $10,000 in debt to consolidate this may be a good option for you.

Home Equity Loan

Many banks offer a home equity loan or line of credit that is equal to or lower than the current amount of equity you currently have.

Pros: The interest rate will most likely be lower than your credit card due to being a secured loan. Also, mortgage interest is usually tax-deductible.

Cons: You’ll need good credit to qualify for a low interest rate. This type of loan is secured with your home so if you don’t pay it back, you’ll be in jeopardy of losing your home.

If you have good credit, enough equity in your home to cover all your current debt, and feel confident that you can make the payments, this could be a good option to consider.

Mortgage Refinance

Similar to a home equity loan, but this option requires you to refinance your mortgage and roll your debt into your current mortgage payment instead of a separate loan for your debt.

Pros: You can qualify for a lower interest rate and again, mortgage interest is usually tax-deductible.

Cons: You’ll hold on to your debt much longer, the entire term of your new mortgage, and your mortgage payments will be higher. Also, most companies charge a refinance fee that can be several hundred to a few thousand dollars.

Only choose this option if you have good credit, a significant amount of debt, a plan to keep from incurring more credit card debt, and you’re confident you can make the new payments.

Debt Settlement Program

Debt settlement is not a traditional form of debt consolidation, as your debt is not rolled into new debt. Instead, it is a way to negotiate with your lenders to reduce your current debt, allowing you to pay it off faster.

Pros: Your current debt is reduced, often significantly, making it easier and more affordable to pay it off.

Cons: Creditors are not obligated to work with you or accept your offer. It often takes a significant amount of time and several communications to work it out. Accounts in good standing are rarely settled, meaning your credit report may have to absorb several months of missed payments (and the resultant damage to your score) before your creditors will be willing to negotiate.

If you have poor credit, limited income, and cannot (or prefer not to) file for bankruptcy, this is an option you may want to consider.

Balance Transfer

Transferring your high-interest debt to a lower interest credit card is another option to consider.

Pros: Many companies offer a promotional period. If you transfer and repay the debt within this period, you could avoid paying any interest.

Cons: Some cards charge a fee for balance transfers. You can’t transfer any balances higher than your credit limit, so it may not cover all of your debt.

If you have good credit and your balances are fairly low on your current cards, this may be a good option.

Debt Management Plan

Debt management involves working with a credit counseling agency, who in turn works with your creditors to consolidate your debts into a repayment plan. You make monthly payments to the agency instead of your various creditors. Creditors generally offer perks – such as reduced interest rates and waived fees – for repaying through a credit counseling agency.

Pros: You’ll work with pros who are educated and will teach you how to avoid financial trouble in the future. Your interest rates will be lower. It’s not a loan, so you can use a debt management plan (or DMP) even if your credit has been damage, and you can cancel the program at any time if it’s not working for you.

Cons: If you miss any payments, the agreement made by the agency on your behalf with your creditors could be voided. You are usually required to close your creditor accounts, which can lead to a temporary dip in your credit score.

If you're concerned about maintaining or rebuilding your credit and have a significant amount of debt that you can’t manage, this could be a good option for you.

There are many options for reducing and eliminating your debt. Finding the right tool to help you repay that debt can make a huge difference in whether or not you find success, so make sure you choose the option that’s right for your situation.

Tagged in Debt strategies, Debt settlement, Debt collection

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at

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