Debt happens.
Sometimes it builds up slowly; a credit card purchase here, an unpaid cell phone bill there. Other times, it arrives in one overwhelming chunk after a medical emergency or unexpected car repair.
No matter how you got there, managing multiple debt payments each month can feel like trying to spin plates while blindfolded—stressful, complicated, and challenging to keep everything in balance.
That’s where debt consolidation comes in. When used the right way, it can simplify your financial life, potentially save you money, and help create a clearer path to becoming debt-free.
We’ll explore what debt consolidation is, when it makes sense, how it affects your credit score, and everything else you need to know to decide if it’s the right tool to put you back in control of your financial future.
The Weight of Debt
If you’re feeling the pressure of debt, take a deep breath: Debt is a reality for most Americans. The average American household carries just over $105,000 in debt, according to Experian data.
It’s surprisingly easy to find yourself in debt. All it takes is an unexpected illness, a car repair you can’t put off, or even the slow creep of everyday expenses outpacing your income.
Credit cards, medical bills, student loans, auto loans—these common debts can pile up quickly, each with its own interest rate, payment date, and terms.
Before you know it, you’re making multiple monthly payments, and a large portion of your income is going to interest rather than reducing your debt.
The stress of juggling these payments can be overwhelming. A 2023 survey by the American Psychological Association found that money is a big source of stress for 72% of Americans, with debt being a major contributor.
Lucky for you, you have options. There are proven strategies to manage and reduce debt, including debt consolidation. Many people find consolidating their debt helpful as a step toward improving their finances.
What Is Debt Consolidation?
Debt consolidation is the process of taking out a new loan or credit card to pay off multiple existing debts. Instead of making several payments each month to different creditors at high interest rates, you make a single payment to one lender, often at a lower interest rate than what you were paying before.
Think of it like shopping at five different grocery stores for years, then making the switch to shop at just one market that carries everything you need. It’s simpler, more efficient, and might even save you money.
Two common types of debt consolidation are balance transfer credit cards and personal loans. Both typically require a credit check, where lenders review your credit history to determine if you qualify and what interest rate they’ll offer you.
The best rates generally go to those with strong credit scores, but options exist even if your credit isn’t perfect. It might just mean you’ll have to pay higher rates.
Balance Transfer Credit Cards
A balance transfer credit card allows you to move debt from multiple high-interest credit cards onto a single card, typically with a low introductory interest rate—often 0% for a promotional period of 12-18 months.
What’s the benefit? During the 0% promotional period, every dollar you pay goes toward reducing your total balance, not just interest. You may pay an upfront fee—typically a small percentage of each balance you transfer—but it may be worth it if having a lower interest rate saves you money over the long term.
In the best case scenario, you’re able to pay off the full balance before the promotional period ends. Otherwise, the standard interest rate (typically 17-29.9%, depending on your credit score) will apply to any remaining balance.
Tip: Set a calendar reminder for the date that the promotional period on your balance transfer card ends. Two months before that date, determine if you’ll be able to pay off the balance in full or if you need a plan B (i.e., a loan from a friend or family member) to avoid high interest charges.
Personal Loans for Debt Consolidation
A debt consolidation loan is a type of personal loan specifically meant to pay off existing debts. These loans typically have fixed interest rates and fixed monthly payments over a set term, usually 2-7 years.
Here’s how it works:
Imagine you’re juggling payments for a credit card, a medical bill, and a car loan—each with different interest rates, payment amounts, and due dates. It’s a lot to keep track of, and those higher interest rates (especially on credit cards) mean you’re making slow progress paying down the outstanding balances.
With a debt consolidation loan you:
- Borrow enough to pay off all your existing debts.
- Pay off each debt immediately.
- Make just one monthly payment, usually at a lower interest rate.
- Have more clarity on when you’ll be debt-free.
The simplicity of one payment makes it easier to budget, and the lower interest rate means you’re chipping away at more of the total balance with each payment.
Pros and Cons of Debt Consolidation
Debt consolidation may be an option if you’re managing multiple payments at high interest rates, but it’s important to understand the complete picture.
Just like any financial decision, consolidation comes with trade-offs that may or may not make sense for you. Before you decide to consolidate, let’s look at what’s really in it for you, and what to watch out for.
| Pros | Cons | ||
| One payment | Simplifies your finances, reducing the chance of missed payments, late fees, and interest rate penalties. | Upfront fees | Balance transfers typically charge 3-5% of the transferred amount; personal loans may have origination fees. |
| Potentially lower interest rate | May reduce how much interest you pay, saving you money and helping you get out of debt faster. | Potential for longer repayment | Lower monthly payments might extend the time it takes to repay the balance, meaning you’ll likely pay more in interest. |
| Clear timeline | Based on your payment and loan terms, you can calculate exactly when you’ll be debt-free. | Risk of more debt | If you continue to borrow money after consolidating, you could end up with even more debt. |
| Credit score benefits | Over time, you could improve your credit score by lowering your credit usage and making consistent on-time payments. | Qualification challenges | You must have a healthy credit score to get approved for the best rates; with poor credit, you may pay higher rates or not be able to qualify. |
Take action: Before applying for any debt consolidation option, gather all your current debt information, including interest rates, minimum payments, and balances. Having all the information in front of you will help you determine if consolidation can save you money.
How Debt Consolidation Impacts Your Credit Score
You might be wondering how debt consolidation and credit score relate to each other, or if they do at all. The short answer is yes, and it can vary drastically depending on how you manage the process and your current credit situation.
Your credit score matters because it affects your ability to qualify for loans and credit cards, and even renting an apartment or getting approved for a mortgage.
Understanding how debt consolidation influences this important number can help you make smarter decisions.
Short-Term Effects
Credit inquiries: Applying for a balance transfer card or personal loan triggers a hard inquiry that can temporarily lower your score by a few points.
New credit account: Opening a new account reduces the average age of your credit accounts, which could cause your score to decline.
Changes in credit utilization: With debt consolidation, your credit utilization ratio (the percentage of available credit you’re using) decreases, potentially improving your score.
However, if you use a balance transfer card and come close to its limit (i.e., maxing out the card), your credit utilization ratio on that card could increase, potentially resulting in a hit to your credit score.
Long-Term Effects
Payment history: Making consistent, on-time payments on your consolidation loan or balance transfer card can gradually improve your credit score, as payment history affects your credit score more than anything else.
Debt reduction: As you pay down your consolidated debt, your credit utilization ratio will decrease, which can positively impact your score.
Diverse credit mix: Maintaining different types of credit accounts (like credit cards and installment loans) and making on-time payments on all of them demonstrates you can responsibly manage various credit accounts, which could improve your score.
Keep old accounts open: After transferring balances, keep your old credit cards open but don’t use them. Keeping those accounts open with zero balances can help strengthen your credit score, as long as you don’t use them to get into more debt.
Sure, your credit score might drop temporarily when you consolidate debt. But don’t worry—that minor dip can lead to bigger improvements later.
Think of it like taking one step back to take two steps forward. The real benefit comes from using debt consolidation as a springboard to getting your financial life back in order.
Finding Your Path to Financial Freedom
Debt consolidation can be a powerful tool for simplifying your financial life, making your debt more manageable, and giving you a plan to get debt-free.
However, it’s not magic: Debt consolidation works best when combined with consistent budgeting, mindful spending habits, and a commitment to avoid new debt.
Before making any decisions about consolidation, take time to understand your complete financial picture and consider talking to a non-profit credit counseling agency that can provide personalized advice based on your situation.
Remember, the goal is to create a sustainable path toward financial freedom. With the right strategy and tools, you can transform your relationship with debt and build a stronger financial foundation for the future.
Kudzu’s features can help you manage debt while supporting your other financial goals:
- SpendSense Alerts notify1 you when you’re approaching spending limits you’ve set—helping you stay mindful of your spending habits and avoid the overspending that often leads to debt accumulation.
- Savings Habits make it easy to automatically build your emergency fund through regular transfers, helping you avoid debt by creating a financial buffer to cover unexpected expenses.
- Covered by Kudzu2 provides automatic transfers from savings to cover transactions when needed (up to 10 times monthly), helping you avoid declined transactions and potential overdraft fees that could add to your debt.
No matter your approach to managing debt, these tools can help you create healthier financial habits and prevent future debt cycles.
Ready to take control of your finances and break free from debt? Sign up for the Kudzu app and start using our toolkit to build stronger spending and saving habits.
- Message and data rates may apply. ↩︎
- Covered by Kudzu™ is an optional overdraft protection feature that uses funds in your savings account to cover debit card transactions that would otherwise bring your account negative, up to 10 times per month. You must maintain at least $50.00 in savings to be eligible for Covered by Kudzu. If the combined balance in your spending and savings accounts is less than the transaction amount, the transaction will be declined. For full terms and conditions, please visit https://kudzumoney.com/policies/#covered-by-kudzu-terms-and-conditions. ↩︎
