Debt Consolidation Options

Comparing 3 options for consolidating unsecured debt.

One of the reasons people often find debt consolidation so confusing is that there is not just one way to consolidate your debt. In fact, if you’re talking about consolidating unsecured debts like credit cards, then there are actually three different ways that you can consolidate effectively. Which method you choose really depends on your financial situation and the specifics about your debt.

The information on this page is designed to help you compare the three main methods for unsecured debt consolidation so you know the pros and cons and can accurately assess which option will work best in your situation. If you have questions or would like an expert opinion on the best option for consolidation in your situation, call us at or complete an online application to request a confidential debt and budget analysis from a certified credit counselor at no charge.

Debt consolidation option 1: Balance transfer

The first option for debt consolidation is a credit card balance transfer. Here’s how it works:

  1. If you have a good credit score, you can apply for a balance transfer credit card that will offer 0% APR for an introductory period – usually between 12 and 24 months.
  2. Once the new card is opened, you transfer the balances from your existing high-interest credit cards to the new card.
  3. Typically, you’ll pay a fee for each balance transferred – 3% is standard.
  4. Once all of your balances are transferred, you eliminate the debt in large chunks by making the biggest payments you can fit in your budget
  5. Ideally, you want to eliminate the consolidated balance in full before the introductory period ends and higher interest rates apply.

This debt relief option is a little limited because it really only works for credit card debts. In other words, you can’t pay off other types of unsecured debt. However, if credit card debt is all you really need to pay off, then this may be the best solution.

Debt consolidation option 2: Personal debt consolidation loan

This second option is a little more versatile because if all or part of the money received in the loan is disbursed directly to you, then you can use the funds you receive to pay off just about anything.

Here’s how it works:

  1. You apply for a personal debt consolidation loan through your bank or preferred lender.
  2. As long as you have a good credit score, you can qualify for a loan at a low interest rate.
  3. In most cases, you will need to provide a list of the debts you’ll be paying off with the loan. These can be any unsecured debt – credit cards, store accounts, collections, medical bills, and even payday loans.
  4. The lender will check your debt-to-income ratio with the loan included. Remember, your DTI has to be below 41% in order to be approved.
  5. If your DTI is below 41% even with the loan included, then the lender will send the money to you and you can distribute it to your creditors to pay off your outstanding debts.
  6. If your DTI is above 41% with the loan included, but it will be below 41% once all of your other debts are paid, then the lender will approve you for the loan but will require “direct disbursement” – that’s where they send the money to your creditors directly on your behalf
  7. With your other debts paid off, the only debt you owe that needs to be repaid is the loan itself.

This is a more versatile form of debt consolidation, but it requires you to have a good credit score in order to qualify at the right interest rate. What’s more, if you have a large overhang of debt and limited income, you may have trouble qualifying because your DTI will be too high for you to be approved. And while you can get a secured home equity loan with a lower credit score, most experts advise against it. Credit card debt is unsecured, so creditors can’t come after your property if you fail to pay. But if you fail to pay back a home equity loan then you home could be at risk of foreclosure.

Debt consolidation option 3: Debt management program

The last option for unsecured debt consolidation is to enroll in a debt management program through a credit counseling agency.

Here’s how it works:

  1. First you get a free consultation from a certified credit counselor to see if your debts qualify for the program and if it’s the right option in your situation.
  2. If so, you enroll through the credit counselor – they get a list of all the debts that you want to include in the program and help you arrange a payment schedule that works for your budget.
  3. The credit counselor calls each creditor you owe and negotiates. They work to reduce or eliminate the interest rate applied to each debt and to get the lender to accept your enrollment in the program – i.e. they agree to take smaller payments at a reduced interest rate
  4. All debts approved are included in your program. You still pay back everything you owe, but you can pay it off faster since the interest is reduced or eliminated.
  5. You make one payment to the credit counseling agency and they distribute the payment to your creditors on the schedule agreed to during negotiation. This means you don’t get any credit damage for repaying your debt on an adjusted payment schedule.

A debt management program is typically used for consolidating any unsecured debt. This is mostly credit cards and store accounts, but it can also include unpaid medical debt, some payday loans and even personal debt consolidation loans if you’ve consolidated in the past on your own but still need help. As long as the creditor is willing to accept your enrollment in the program, your debt can be included.

What are my options for consolidating other types of debt?

If you have other types of debt – student loans, tax debt, etc. – that you want to consolidate there are options available to do so. However, in general you can only consolidate debt with other similar types of debt. So you can consolidate credit cards with other unsecured debts, but not with federal student loans or tax debt. Those have to be consolidated separately.

If you have student loan debt and need to consolidate…

There are two main options for consolidating student loan debt:

  1. A federal Direct consolidation loan allows you to consolidate any federal student loan debt as long as you have at least one Direct or FFEL loan in the group of loans you want to consolidate. This even works for parent PLUS loans, graduate PLUS loans, Perkins loans, and even previous Direct Consolidation Loans. As long as the loans you want to consolidate are federal.
  2. A private student consolidation loan allows you to consolidate federal AND private student loan debt together so you can roll all of your student loans into one monthly payment. However, most experts advise against consolidating federal student loan debt into a private loan. Doing so makes those debts ineligible for federal loan repayment plans and public service loan forgiveness.

With that in mind, if you have federal and private student loans, you may wish to consolidate the federal loans together with a Direct consolidation loan and then consolidate the private student loans together with a private consolidation loan. You’ll still have two payments to remember to cover in your budget each month, but it will minimize your risk and make it easier to pay off without limiting your options if you get into trouble later.

If you have tax debt to consolidate…

“Tax debt consolidation” is a bit unique because IRS tax debt doesn’t really work the same way as consolidation for other types of debt. Each year that you fail to pay what you owe on a tax return creates a tax debt that you owe. So “back taxes” include every year of taxes than you haven’t paid.

An installment agreement (IA) that you arrange with the IRS can roll multiple years of unpaid tax debt into a single repayment plan. So it essentially consolidates your tax debt because you pay back everything you owe in one cohesive organized schedule.

Just be careful – if you have an existing IA and then you add on new tax liabilities for another year it can jeopardize your existing IA payment agreement. So, for example, if you have an existing IA that you’re paying and then you make a mistake on this year’s tax returns and receive a delinquent tax debt notice, it will invalidate your current IA. Always consult with a tax professional carefully if you have outstanding tax debt to make sure you’re on the right track to pay back what you owe.

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