Everything you need to know about consolidating debts

Consolidating debts can help you repay debts faster, lower your interest rates and improve your credit. Learn if debt consolidation is a good financial move for you and how to get started.

Tags: Debt, Debt consolidation, Loans
Published: August 26, 2020

Consolidating debts can sound intimidating, and doing it successfully means making strategic decisions and having a clear understanding of your financial situation. Luckily, it’s not nearly as difficult as it sounds. Here, you’ll learn the ins and outs of debt consolidation, if it’s the best financial move for you, and what you need to know to get started.
 

What is debt consolidation?

To put it simply, debt consolidation combines all of your debts into one payment. When done correctly, debt consolidation can bring down the interest rates you’re paying on each individual loan and help you pay off your debts faster.
 

How do I consolidate debts?

There are a few ways to start the debt consolidation process. One strategy is to get a credit card with a low interest rate that allows balance transfers. Balance transfers allow you to move debt from one credit card to another, putting all of your debt in one place so you don’t have to pay interest on multiple cards. Watch out for cards with high balance transfer fees — look for a card with an interest rate between 3% and 5%. The U.S. Bank Visa® Platinum card has a 0% introductory annual percentage rate (APR)1 on purchases and balance transfers for the first 20 billing cycles. This allows you to move your debt onto one credit card with a lower interest rate, saving you money, and piled-on interest payments, in the long run.
 

Another strategy is taking out a fixed-rate debt consolidation loan. A debt consolidation loan is calculated by the amount you owe across all of your cards. You can use the money your bank or credit union lends you to pay off your debts more quickly. Rather than paying back multiple debts and interest rates, it’s one loan with a fixed interest rate, which can make your monthly bills more affordable and easier to keep track of. Plus, a debt consolidation loan can diversify your credit lines and improve your credit score when you make your payments on time.
 

What’s the difference between a debt consolidation loan and a personal loan?

There’s not a big difference between personal loans and debt consolidation loans. You can work with a banker to figure out the best way to tailor your personal loan to that of a debt consolidation loan. The terms will be based on factors like your credit score, credit history and the amount of debt you’ve accumulated. You’ll want to pursue a loan with a low interest rate and a repayment period that is comfortable for your budget. You can learn more about loan options and consolidating debt with U.S. Bank here.
 

Is debt consolidation a good idea?

Not always. Debt consolidation is a great way to get on top of payments and to make a plan for the future of your finances, but it’s not a guaranteed way to get out of debt. Before considering debt consolidation, make sure your spending habits are in check, that you’re making your current payments on time and your credit score is in good shape. This makes it easier to get a card that allows balance transfers or a loan from your bank. Additionally, debt consolidation might not be worth it if you can pay your balances off within the next 12-18 months at your current repayment rate. On the other end of the spectrum, if your debt load is more than half your income or the amount you owe is overwhelming, it might be a better idea to explore debt relief options.
 

There are a few indicators that debt consolidation may be right for you. If your income is enough to make your current payments on time and your credit score is high enough to qualify for a low-interest credit card or fixed-rate loan, you’re already on the right track. In addition, if your debts (excluding your mortgage) are less than half of your income, that’s another indicator that debt consolidation might be a good option for you. In order to get the most out of debt consolidation, make sure you’re sticking to a budget or financial plan that prioritizes your monthly repayments.

 

Want to learn more about how you can pay down credit card debt? Read on for more insights from a few of us from U.S. Bank.

 

1The 0% introductory APR applies to balance transfers made within 60 days of account opening. The introductory rate does not apply to cash advances.  Balance Transfer fee of 3% of each transfer amount, $5 minimum, whichever is greater, will apply. We apply your minimum payment to balances with lower APRs first, including promotional APRs. Amounts paid over the minimum payment will be applied in the order of highest to lowest APR balances.