How To Decide if Debt Consolidation Is for You

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

For Abe F. of the borough of Staten Island in New York City, his $13,000 in credit card debt was getting to be too much to handle. "The interest would nullify the payment," he says. "You can't go on like that."

For help with his credit card debt, Abe, who agreed to tell his story only as long as his full name was not used, reached out to Consolidated Credit, a nonprofit credit counseling organization in Fort Lauderdale, Florida. It enrolled him in a debt management plan.

"They came up with a payment plan. They were able to speak to my bank and get my interest rate way down," he recalls. "I'm very happy my money is going toward a solution."

After years of struggling with credit card debt, he had found a way out. "They pretty much made it possible for me to go forward," he says. "I'm grateful to them."

If you have high-interest credit card debt, especially if you have multiple debts, you may benefit from debt consolidation. You'll have one payment to make each month rather than many and you may land a lower interest.

Here is a roundup of the types of debt consolidation strategies that you can use to simplify your financial life.

1. Credit card balance transfer. If you have good credit, transferring credit card balances to a single card with a lower interest rate will save you on interest rate charges and give you just one payment to manage each month instead of many. Here is a look at the pros and cons of credit card balance transfers.

"Making a balance transfer can be a great tool for managing debt," says April Lewis-Parks, director of financial education at Consolidated Credit. "One of the main benefits is moving high-interest debt to a card with a lower or even 0% introductory interest rate. This saves you money on interest charges allowing you to pay off your balance faster."

But there are some downsides to keep in mind.

"Many balance transfer offers come with fees — usually a percentage of the amount you transfer," Lewis-Parks says. "If you don't pay off the balance within the promotional period, the interest rate can jump significantly."

But there are steps to make sure a balance transfer is a positive one.

"To ensure a successful balance transfer make sure you understand the fees, promotional period and what the interest rate will be after the promotion ends," she says. "Next, plan your payments. You'll want to divide your balance by the number of months in the promotional period and create a budget that allows you to pay it off during that time."

Another key tip for paying down credit card debt with a balance transfer is to buy nothing with the new card. "Many cards apply payments toward the balance transfer first, leaving new purchases to accrue interest," she says.

"Finally," Lewis-Parks adds, "keep track of your payments — set up automatic payments to avoid missing any deadlines."

2. Home equity loan. Another strategy for debt consolidation is tapping into your home's equity.

"Using a home-equity loan to consolidate multiple debts can be a smart strategy if you're looking to simplify your finances and reduce your monthly payments," Lewis-Parks advises. "The biggest advantage is that home-equity loans often come with lower interest rates than credit cards or personal loans. This can save you a significant amount of money in interest over time, especially if you have high-interest debts.

"Consolidating everything into one loan makes repayment more manageable, as you're only dealing with a single monthly payment instead of juggling multiple bills."

But there are some risks to consider with a home-equity loan.

"The biggest one is that you're putting your home on the line," she says. "Since a home equity loan is secured by your property, failure to make payments could result in foreclosure.

"Another potential downside is that while you may lower your monthly payments, you're extending the repayment period, which could mean you're in debt longer. Plus, there are often upfront fees and closing costs associated with home equity loans, which may offset some of the savings."

3. Debt consolidation loan. Moving multiple debts into one debt consolidation loan is one way to simplify payments and, if your credit is good enough, lower the interest rate on your debt.

"Debt consolidation loans can provide a simplified approach to managing multiple debts by combining them into a single loan," says Bruce McClary, senior vice president of media relations at the National Foundation for Credit Counseling in Washington, D.C. "By potentially securing a lower interest rate, you can reduce the overall cost of your debt."

But you'll have to watch out for fees.

"Be aware of potential fees associated with these loans and the potential impact on your credit score during the application process," McClary adds. To increase the chances of being approved for a consolidation loan, he recommends that applicants review their credit report, compare offers from multiple lenders and carefully review their budget to make sure they can afford the monthly payments.

Check for debt consolidation loan offers from your bank or credit union or from online lenders. And you may receive offers from potential lenders as well.

"These days, companies that specialize in debt consolidation loans will probably find you before you start looking for them," says Martin Lynch, director of education for Cambridge Credit Counseling in Agawam, Massachusetts. "They surf credit reports looking for folks who don't miss payments but also have high credit balances.

"The advantage of these loans is, again, that you can repay high-interest rate debt at a lower rate, saving money in the process."

4. Debt management plan. If you have a number of high-interest credit card bills you may wish to consider a debt management plan from a nonprofit credit counselor. Rather than juggle multiple bills, you pay one bill to the credit counselor and the counselor makes payments to the credit card companies.

"Experience has taught us that this is the best option for most consumers," says Melinda Opperman, chief external affairs officer at Credit.org in Riverside, California. It has the benefits of other options, such as monthly payments consolidated into one payment.

"The payment is affordable and you get concessions like reduced interest rates," Opperman says.

In a free counseling session, a nonprofit credit counselor evaluates your situation and explains the ins and outs of a debt management plan.

"What's great about credit counseling is that it's free, and there's no obligation," Opperman says. "You can get counseling to find out if a debt management plan is a good option for you."

But there are downsides to a debt management plan. You will have to close your credit card accounts while you are on the plan.

"That's hard to do, especially for people who are used to having access to credit," Opperman says. "But we see it as a plus — it guarantees that you won't be able to get deeper into debt while you work to pay down your balances."