Choosing the Best Debt Consolidation Option

Have you ever started to dread the time of the month when bills come due — not just because you’ll have to part with your hard-earned money to cover the balance and any interest that accrued, but also because it can feel like a full-time job trying to keep up with multiple accounts? Consider debt consolidation.

The average American has more than one credit card — four, to be exact. Furthermore, the average credit card balance has surpassed $6,000, according to data from Experian. This can make paying bills more complicated as you try to satisfy each of these obligations on time by paying at least the minimum while also trying to figure out the best way to use your funds to chip away at these balances.

Debt consolidation with a firm like can do two things for you in this regard: reorganize multiple debts into one monthly payment and reduce the amount of interest on those debts.

There are a few different approaches to consolidation. Choosing the best fit for your financial situation will help you get the most from this strategy. 

Read on to learn more.

Option #1: Personal Loan

The idea here is to use a personal loan to wipe out expensive credit card debts all at once, then repaying that loan in fixed monthly installments at a lower interest rate.

Because lenders approve loans and set interest rates based on credit score, this is an option primarily for borrowers with good or excellent credit — at least on unsecured loans. Securing an asset against a loan, like a home, can help borrowers with lower credit scores get approved — as can adding a cosigner.

Before choosing a loan, plug the relevant numbers into a consolidation calculator to see if you’ll be saving money over paying down your outstanding debts “the old-fashioned way.” For instance, stretching out the loan term to bring down monthly payments can cause you to pay more in interest over the loan’s life.

Option #2: Balance Transfer Credit Card

Balance transfer credit cards
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Sick of watching your credit card interest grow due to sky-high interest rates? You may be able to transfer the balances to a brand-new card with an interest-free or low-interest introductory period. You’ll then have a set time in which to make payments directly toward the principal balance without interest compounding. Balance transfers are also not free; many charge a fee between 3 and 5 percent per transfer.

This is another strategy generally requiring a strong credit score. It’s also a potential problem for cardholders tempted to spend on credit, as that shiny introductory period does not apply to purchases, only to funds transferred. Only proceed if you’re confident you can avoid the temptation to add to your balance lest you end up worse off than you started.

Option #3: Debt Management Program (DMP)

There’s absolutely no shame in wanting or needing help with your debts. Non-profit credit counseling agencies exist to help borrowers get professional help with budgeting and handling debts. Entering a DMP means handing over the reins in part to the agency — you’ll make one monthly payment, and it will disperse the funds accordingly to your creditors. Participation in a DMP may earn you interest rate reductions or waived fees.

This strategy does entail paying fees to the agency, and you should be prepared to cease using credit for three to five years — or even to close certain accounts.

Option #4: Cash-Out Refinance on Mortgage

Loan application
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Homeowners who’ve built up equity may have the option of refinancing their mortgage and using the funds to prioritize high-interest debts. Since the annual percentage rate (APR) on mortgages tends to be much lower than on credit cards, this tactic can help borrowers save. However, it’s important to consider the implications of lengthening your mortgage before going ahead, as your home is ultimately at stake. There are also closing costs and fees to factor in.

Choosing the best debt consolidation for your financial situation will help you reap the most benefits while avoiding this strategy’s downsides.

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