How to Consolidate Debt

Every year, many Americans consider rolling their outstanding debts into one manageable monthly payment, usually with a lower interest rate. If borrowers can consolidate their debts to a low-interest loan, they could save money on interest by paying off their debt faster while simplifying the payment process.

Consolidating debt can save you money over time if you consolidate higher-interest debts into a single lower interest loan. In many cases, it's a sensible financial strategy that can make paying off debt more manageable and affordable.

What is Debt Consolidation and How Does it Work?

Debt consolidation can help simplify your monthly payments and reduce your overall debt burden, but it's important to understand how consolidating debt works before you take this step.

The main goal of debt consolidation is to lower your interest rate and simplify the payment process. Once approved for a personal loan, you can consolidate your high-interest debt, including multiple credit card balances with varying interest rates, into a single monthly payment. Paying off several debts in one amount is sometimes simpler than juggling various balances and interest rates.

Steps for Debt Consolidation

Calculate how much debt you have

Figuring out how much you owe is a critical first step in consolidating debt. This will allow you to implement a plan that fits your budget and helps you determine how much you can borrow.

Determine your average interest rate

Each of your credit card balances and other debts will likely have a different interest rate. Before you consolidate your debt, use a debt consolidation calculator to determine if you can save on interest by consolidating your debt into a single monthly payment at a lower interest rate.

Identify an affordable monthly payment

Debt consolidation should help you identify a more affordable monthly payment. The amount you pay each month should be weighed against your household budget and may depend on necessities such as food and utilities. You could use an online debt consolidation calculator to ensure that the monthly payments are affordable on a personal loan.

Evaluate your debt consolidation options

There are many options for debt consolidation. You may consider a debt consolidation loan or a debt management plan. Each method has advantages and disadvantages, so review the details of each before choosing the option that works best for you.

Advantages of Debt Consolidation

Here are some of the advantages of debt consolidation:

1. Lower interest rates: Lenders sometimes offer lower rates than you currently pay on your various debts.
2. One monthly payment: Consolidating simplifies your finances with just one monthly bill instead of multiple ones.
3. Pay debt faster: If your consolidated loan offers an interest rate lower than the rates on your existing debts, consolidating can help you pay off your debt faster.
4. Credit improvement: Debt consolidation could lower your credit utilization ratio, which measures how much available credit you use. Lower credit utilization may positively impact your credit score if you consistently make monthly payments. Both factors can assist in improving your credit.

Frequently Asked Questions

How does debt consolidation affect your credit?

Consolidating debt impacts your credit in a few different ways. As stated above, paying off your debt after consolidating could improve your credit. But in the interim, debt consolidation could negatively impact it.

For instance, lenders may perform a hard inquiry on your credit file, which may cause a temporary decline in credit score. Additionally, opening a new credit account lowers your average account age; thus lowering the age of your credit history and could impact your creditworthiness.

Is debt consolidation the right choice?

Debt consolidation can be the right option for responsible borrowers with high-interest debt. It usually lowers your average interest rate and simplifies the payment process with monthly installments.

However, if you have a small amount of debt that can be paid off quickly, there is little reason to consider consolidation.

What are the risks of debt consolidation?

If you fail to repay your monthly payment under a debt consolidation loan, you risk defaulting on the loan, which means the lender could close the account. Your credit score and credit history could also be damaged, making it harder to take on loans in the future.

Does debt consolidation work on a limited income?

Debt consolidation may still work for borrowers with a limited income. A debt consolidation loan should still be beneficial as long as the borrower can find an affordable monthly payment, and a borrower does not add additional debt.

There are certainly risks for borrowers with limited income. If the borrower finds it not suitable, debtors may be unable to ensure their monthly payment is reasonable for your income.

What type of debts or loans can I consolidate?

Several types of debts can be consolidated. Credit card debt, personal loans and unpaid medical bills can all be consolidated with a personal consolidation loan.

Do I have to consolidate all my debt?

No. You can consolidate your most problematic debt when you have high-interest debt. One of the main goals of debt consolidation is to reduce your interest expense. However, if you only have a small balance with a low or lower average interest rate, consolidating the debt may not be necessary or beneficial.

Who can help me consolidate my debt?

If you decide to consolidate your debt with a personal loan, you could research banks, online lenders, and credit unions to find a loan that matches your needs.

Citi offers personal loans to existing Citi customers and new Citi customers who meet specific eligibility criteria, including an established credit and income history, along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.