Three Ways To Consolidate Your Debt

Debt is a common but often frightening problem, and depending on your income and credit score, it may seem like there's no way out. However, there are multiple ways to take care of debt, including some that will close your old credit lines for you or provide you with a counselor who can help you manage your payment plans.

Personal Loans

There are two major ways you can use a personal loan to consolidate your debt, and both can be handled through your local bank or credit union. They may at first appear to be the same, but there are slight differences in how they work.

  • With a basic personal loan, you receive the money being loaned and decide what to do with it, such as paying off your credit cards.
  • With a loan specifically for debt consolidation, you still take out a loan from the bank or credit union, but the bank pays off your outstanding debts for you, and you don't receive the money. In some cases, some of your old credit lines may be closed once the bank pays them off.

Beyond that, these are both unsecured loans -- meaning you are putting up no collateral -- with their own interest rates, so in that way they work the same. There are a few things to consider here.

First, if you've found yourself in debt because of poor money management, it may be better to let the bank take care of your debt and close some of your accounts. If you want more control over where your money goes and have your own plans, a basic personal loan where you manage all the money may be more appealing.

Second, make sure you're aware of the interest rates of these loans going in; you can often use a calculator to estimate what your interest rates might be. If the interest rate on the loan is higher on average than the credit lines you're trying to pay off, that defeats the purpose of getting the loan in the first place. You may get better rates by looking at different banks, but your credit score will come into play here, which can hurt if you already have bad credit.

Debt Management Program

A debt management program (DMP) also works by paying off your other debts for you, but it's different in that DMPs typically aren't managed by banks. Rather, they're managed by credit counseling organizations. This comes with some pros and cons, namely that this option is more accessible to people with lower credit, but that there are more restrictions in turn to make sure the applicant is meeting their end of the bargain.

With a DMP, a credit counselor negotiates with creditors on your behalf for a decent interest rate and payment schedule. They can also help you plan what works best for you based on your income and expenses so that you aren't overwhelmed. The tradeoff for this assistance is that you must agree to the specific payment plan, the monthly payment, and other details. You may also be required to close all of your pre-existing credit lines, and may even be stopped from opening new ones. This option gives you less control, but is a safe way to get rid of debt even if your credit score isn't high.

Balance Transfer

The balance transfer method of consolidating debt involves signing up for a new credit line -- typically one with an offer for 0% APR for a certain duration -- then transferring balances from other credit lines to the new one and paying the new one off instead. This method is handy because it essentially negates any interest fees from old credit lines. If you have high interest rates with old loans or credit cards, this can save you plenty of money. There are three potential issues with this method, however.

  • There are usually balance transfer fees, which can add a little extra money to your debt
  • The interest is only negated if you pay off the full amount before the introductory period is over; then the full interest kicks in on your remaining balance
  • This doesn't close your other credit accounts, so some responsibility is needed here; if you are tempted to use your old credit cards again, you'll have even more debt

If you have a lot of debt, this likely won't solve your problem in one go. Unlike a loan, your credit limit will probably be lower than your total amount of debt unless your credit is already very good. But responsible payments made with no interest are a great tool to use. You can also do this more than once, but it will likely have to be in succession rather than all at once -- as your credit utilization ratio increases, your chance of being approved for a new credit card decreases.