Consolidation Changes Three Things
Combining several debts into one loan alters the rate, the term and the number of payments. Only the first is unambiguously good:
- Rate — a lower rate genuinely reduces cost, and is the whole point.
- Term — a longer term lowers the monthly payment and raises the total paid. This is where consolidation deals that look cheap turn expensive.
- Simplicity — one payment instead of five. Real value for anyone missing due dates, worth nothing otherwise.
The Test
Compare total interest, not the monthly payment. A consolidation loan that cuts the payment from $615 to $420 while extending repayment from three years to five can cost more in total despite a lower rate. The calculator above sets the two totals side by side, including the origination fee.
The Options
| Method | Typical rate | Best when |
|---|---|---|
| Personal loan | 8–20% | Good credit, fixed payoff date wanted |
| 0% balance transfer | 0% for 15–21 months, then 20%+ | Balance can be cleared inside the promotion |
| Home equity loan | 8–10% | Substantial equity and stable income — the house is collateral |
| 401(k) loan | Prime + 1–2% | Job is secure; the balance is due quickly if you leave |
| Debt management plan | Reduced by the agency | Rates are unmanageable; use a non-profit counsellor |
The Behavioural Risk
Consolidation moves debt off the credit cards and leaves those cards with zero balances and full limits. Research on consolidation borrowers consistently finds a substantial share re-accumulate card balances within two years — ending with the loan and the cards. The loan does not address why the debt appeared, and clearing the cards can feel like progress that has not actually occurred.
The practical safeguard: close or freeze the cards as part of the consolidation, not afterwards.
What to Avoid
Debt settlement companies charging upfront fees, promising to negotiate balances down while instructing you to stop paying creditors. The approach devastates credit, forgiven debt is usually taxable income, and the fees are substantial. Non-profit credit counselling through an NFCC-affiliated agency is the legitimate version of the same idea.
Frequently Asked Questions
Does consolidation hurt my credit score?
Briefly — a hard inquiry and a new account lower the average age. Within a few months, the reduced card utilisation typically raises the score above where it started.
Can I consolidate federal student loans with credit card debt?
Not without losing the federal protections. A private loan large enough to cover both surrenders income-driven repayment, forbearance rights and any forgiveness eligibility.
What credit score do I need?
Meaningful rate improvements generally require 660 or above. Below roughly 600, offered rates often exceed the card rates being consolidated, which defeats the purpose.