Consolidating your debts can be a helpful tool that you can use to more effectively manage your debt. But it will make more sense for some borrowers than for others.
Here’s when it could be a good move.
You have good credit and a favorable debt-to-income ratio:
Borrowers with good credit and a debt-to-income (DTI) ratio of 50% or lower are most likely to benefit from consolidating debt. If you’re among this group, you’ll have a better chance to get approved for a debt consolidation loan of 0% credit card that you can use to consolidate debt.
You can lower rates through debt consolidation:
Lenders also reserve lower rates for applicants with good credit — if that’s you, you’ll have a better shot at getting low debt consolidation rates that will save you money.
If you’ve run up high balances on credit cards, for instance, a loan for consolidating debt can lower your interest costs now and help you get out of debt faster. If you owe $7,500 across credit cards with an average APR of 25%, for example, interest charges alone will be $156 per month. Consolidate these debts into a lower-interest personal loan with a 13% APR, however, and you’d immediately cut interest costs nearly in half to just $81 per month.
You can afford your new monthly payments:
A loan can also be helpful if you’re looking to lower monthly payments and free up cash flow. Perhaps you took out one or two personal loans a few years ago and the payments are stretching your current budget too thin. You could consolidate these loans with a longer term, stretching payments out and lowering your monthly costs.
Borrowers looking to pay more each month might also benefit from debt consolidation. They’ll just want to choose a shorter loan term, which has the added benefit of often being paired with lower rates. If you’re considering this move, make sure you can comfortably cover the higher monthly payments each month.
Lastly, debt consolidation should be just one part of your plan to get out of debt. Get a strategy in place to help you practice better spending and borrowing habits. Set yourself up for success in repaying your debt consolidation loan or credit card balance, and commit to staying out of debt in the future.