How to Consolidate Debts

Debt consolidation is one option the Federal Trade Commission recommends when collection calls and past due notices become an everyday norm. Although no single debt management strategy works for everyone, combining many debts into one payment can work if your level of self-discipline matches your desire to correct a bad financial situation.

Preparatory Steps

List each debt, including the creditor, account number and the outstanding balance.

Categorize each debt according to whether they involve credit cards, personal debt such as medical bills, private student loans or federal student loans. While the two options are a consolidation loan or a credit card balance transfer, within these are additional options that apply to specific categories.

Get a free copy of your credit report from AnnualCreditReport.com from each of the three main reporting agencies. Review each one to make sure the information it contains is current and accurate before you attempt to consolidate any debts. Contact the reporting agency and the company providing the information in writing if you uncover errors. The Federal Trade Commission outlines dispute procedures and provides sample dispute letters on its website. This step is critical because your credit history and credit score affect interest rates and possibly term lengths.

Explore Loan Options

Debt consolidation loans are available from banks, credit unions, finance companies and the federal government. These include personal loans, home equity loans and student loan consolidations.

Personal Loans

Use a personal loan to consolidate personal and credit card debt. It’s important to comparison shop if you choose this option, as lender requirements vary widely. Some offer loans specifically for debt consolidation, while others offer loans to use for any reason. Interest rates depend on your credit score. This is especially true for unsecured personal loans. Use a debt consolidation calculator to compare interest rates and term lengths to make sure you choose the best deal.

Home Equity Loan

Homeowners with enough equity can consolidate all debts with a home equity loan. Interest rates are generally lower, and term lengths may be longer, because your home serves as collateral, which reduces the lender’s risk. This type of loan may also have tax advantages.

Student Loan Consolidations

Many banks and private finance companies offer private student debt consolidation loans. The Department of Education offers federal student loan consolidations. While you can include federal and private loans in a private consolidation loan, you can’t include private loans in a federal loan consolidation. Consolidate private and federal student loans separately. Unlike with most loans, interest rates and terms with a federal loan consolidation do not depend on your credit score.

Credit Card Balance Transfer

If most of your debt is for credit cards, a balance transfer may be a good option. This involves opening a new credit card account to use only for transferring the outstanding balances on your existing credit cards. Look for a card that offers an interest-free introductory period, and compare fees that may apply when the introductory period expires.