Key takeaways
- Unsecured debt, such as credit cards, student loans, medical bills and high-interest loans can all be consolidated.
- Debt consolidation can simplify your bill-paying strategy by consolidating multiple accounts into one new loan with a single payment.
- Consolidating debt can save you money on interest and help you get out of debt faster, depending on your situation.
If you have a variety of different types of debt, you may be wondering which can be combined. Most people will consolidate one or a combination of the following four types of debt: credit cards, student loans, medical debt and high-interest personal loans.
Knowing which debt you can consolidate — and when it makes sense to — can put you on track to save money on interest, pay debt balances off faster or both.
Credit card debt
Combining credit card debt is typically the most common reason people take out a debt consolidation loan. Borrowers often rack up credit card balances during the holidays, to cover emergencies or to make ends meet. Carrying balances on multiple cards can make it more likely that you’ll forget a payment, carry balances too long and ultimately lower your credit score.
Why you should consolidate credit card debt
Consolidating credit card debt has financial benefits that include cost savings, potential credit score improvements and paying your debt off faster.
Cost savings
Credit card rates are typically very high. The average credit card rate is over 20 percent, compared to debt consolidation loans, which are typically much cheaper. For example, the average rate for a personal loan is about 12.65 percent.
If you paid off $10,000 worth of credit card debt that had a 20 percent APR with a new 60-month personal loan with a 13 percent rate, you could save a bundle compared to making minimum payments on your credit cards.
| Credit card | Personal debt consolidation loan | |
| Total interest paid | $16,056.59 | $3,651.84 |
| Monthly Payment | $266.67 | $227.53 |
| Months to pay in full | 364 | 60 |
The personal debt consolidation loan saves you $12,404.75 over the life of the loan, $39.14 per month in payment and pays your loan off 25 years faster.
Faster payoff
Credit cards are a type of revolving credit. When credit is revolving, it means you can reuse it, again and again. You also have a minimum payment option, which usually pays little more than the interest charges each month. These two features often keep borrowers in credit card debt longer than they would be with an installment loan like a personal loan.
With an installment loan, you receive all of your funds at once and pay the balance off over a fixed period. Most personal debt consolidation loan terms are between two and five years. That gives you a definite payoff date since the balance doesn’t revolve like it does with a credit card.
Keep in mind:
If you have excellent credit, you could qualify for a low-interest personal loan with rates as low as 6.5 percent, allowing you to pay off your debt in a significantly shorter amount of time.
Credit score benefits
High credit card balances hurt your credit scores. Thirty percent of your FICO Score is set by how much of your available revolving credit you’re using, also known as your credit utilization ratio. The more you use, the more it can drop your credit score.
With a personal debt consolidation loan, you replace revolving credit balances with an installment loan, which doesn’t impact your credit utilization ratio. Consolidating your debt and making the monthly payments is a sure-fire way to quickly increase your score by lowering your utilization levels.
Bankrate insight
Financial experts often recommend a balance transfer credit card to pay off your outstanding credit card debt. With good credit, you may qualify for a balance transfer offer with an interest rate as low as 0 percent for six, 12 or even up to 24 months.
One caveat: Since the new balance transfer card is still a revolving account, the credit score benefit might not be as significant as using a personal loan. Even worse: If you don’t pay down the balance by the end of the offer period, you could find yourself stuck with more high-interest debt down the road.
Student loans
Student loan consolidation is a popular option for recent graduates who may have several student loans from pursuing undergraduate or even graduate degrees. However, consolidation is only possible for federal student loans taken out through the Department of Education.
You may be able to consolidate both federal and private loans by refinancing with a private student loan lender. If you have excellent credit, private student loan refinance rates may be lower than what you’re paying on your federal loans.
Why you should consolidate student loans
You may be able to lower your rate, spread out your loan term to lower your payment or simplify your monthly bill payments to just one student loan. It’s important to remember that you’ll lose access to federal student loan benefits if you use a private refinance loan.
Lower interest rate
You won’t typically save money on a federal student loan consolidation, since the rate is the weighted average of your existing loans. Your best bet for a lower student rate is to boost your credit score as high as possible, so you’re eligible for the lowest private student loan refinance rates.
Extended repayment term
The Direct Consolidation Loan program allows you to spread your payment out as long as 30 years, which could give you a substantially lower payment on your federal student loan balances.
You may also be able to combine your federal balances with a private student loan refinance, with some lenders offering terms over 20 years in special cases. Just remember: The longer you take to pay the balance off, the more total interest you will pay.
Credit benefits
If you took out multiple student loans to complete an extensive education, you may have quite a pile of outstanding accounts to keep track of.
By reducing your number of outstanding accounts, you might see your credit score improve a few points, since the number of outstanding accounts makes up 10 percent of your credit score.
Bankrate insight
Consolidating your student debt can also save your credit report in the long run if you miss your monthly payment and it shifts to delinquent status. When you consolidate, you only have one loan and therefore only one account will have a delinquent payment report. One late payment still isn’t good for your credit score, but it’s less damaging to your credit health than late payments on several student loan accounts.
Medical debt
According to findings from the most recent West Health-Gallup Survey, 12 percent of Americans had to borrow money in the past 12 months to pay for healthcare for themselves or someone in their household. If you’re sitting on dozens of unpaid bills and getting past-due notices, consolidating the debt may be a solution.
Why you should consolidate medical debt
Simplifying your payment schedule can remove a stress burden while you or a family member recover from a medical event. You’ll have an easier time keeping track of bills, and may even realize some credit benefits if you end up avoiding collections for unpaid bills.
Make repayment more manageable
Personal loans can be a good method of consolidating medical debt if the payment options offered by providers are too expensive. A 0 percent interest credit card may also get the job done at a low cost, if you can pay the balance off within the no-rate promotional period.
On the downside, consolidating medical debt means you’ll most likely pay interest on it — at least if you pursue the personal loan route. Still, if these bills have been sitting there for a while, it may be worth a try.
Credit benefits
If your medical debt totals $500 or more and has been unpaid for a year or more since your doctor’s appointment, the balance could be sent to collections, hurting your credit score. You can avoid getting negative marks on your report by consolidating the debts before they become excessively late.
Personal loans
If you recently took out several high-interest-rate bad credit personal loans to consolidate credit card debt and improve your scores, it may be time to look at combining them into one new personal loan. Personal loan rates range from 6.5 percent to 36 percent, and even an improvement from bad to fair credit could reduce your personal loan rate by 5 to 10 percentage points.
Why you should consolidate personal loans
Having more than one personal loan can put a strain on your budget, and the fewer payments you have to keep an eye on, the less chance you’ll miss a payment. Plus, if you’ve been diligently taking steps to improve your credit score, it may have improved enough that you qualify for a much lower rate.
Save on interest
The most common reason to pay off several personal loans with a new one is to get a better interest rate. That said, the lowest rates typically go to borrowers with excellent credit for terms of three years.
Make sure you can handle the higher payment that comes with a shorter term to avoid taking on a debt you can’t afford.
Extend your repayment term
If you had to take out a short-term loan to qualify because of bad credit, but your credit scores have since improved, you may qualify for a longer term on a new personal loan. You’ll pay more in total interest, but you can apply the extra monthly savings to the loan balance or boost your emergency savings account if it’s running low.
Bottom line
There are not many types of debt that can’t be consolidated. Although we’ve covered credit cards, student loans, medical debt and personal loans here, you can also consolidate secured boat loans, auto loans and even mortgages on multiple homes.
However, the ultimate goal should always be to save more and borrow less. Debt consolidation — if used wisely — can be a helpful tool to get your debt under control and paid off as quickly and cheaply as possible.
Read the full article here
