What Is Debt Consolidation?

What Is Debt Consolidation?

Debt consolidation is a financial strategy that combines multiple debts into one monthly payment. Instead of paying several different creditors each month, you make a single payment to one lender. This may simplify how you manage your money.

What types of debt can be consolidated?
Debt comes in all shapes and sizes. Common types of debt that you can consolidate include:

• Credit card debt
• Personal loans
• Medical bills
• Other unsecured debt (not tied to property)
  
  

When Should I Consolidate My Debt?

Not everyone needs to consolidate debt, but it may offer benefits if you:

• Are paying high interest rates on multiple debts: Moving balances to a lower-rate loan might reduce how much you pay overall.¹
• Have difficulty staying organized: If you're struggling to keep track of due dates across multiple accounts, one payment could be easier to manage than many.
• Are facing a long repayment timeline: Consolidating earlier in the process may lower costs and simplify payments over time.
   

That said, consolidation works best when you also address what led to the debt in the first place. If you're spending more than you earn, a consolidation loan won't fix that on its own. It's worth making a budget first. If there's not enough to cover your debt payments, you may need to look at cutting expenses before consolidating.

It may also help to reach out to your creditors. Some might be willing to work with you to lower your interest rate or change your due date. 
 

How do I find the right debt consolidation plan?

The right plan depends on your financial situation, the total amount you owe and your credit history.

There are several options to consider:

• A low introductory APR credit card balance transfer: This allows you to pay off debt by transferring the amounts you owe to a credit card with a temporary low APR. If the transferred balance isn't paid in full before the introductory period ends, the APR on the remaining balance may increase significantly.
• Personal loan: This combines your debts into one loan with a fixed rate and a set number of payments.
• Home equity line of credit (HELOC): This lets you borrow against the value of your home. This choice may offer a lower rate, but you use your home as collateral.
• Credit counseling or debt management plan: This involves working with a counselor to review your finances and create a structured repayment plan.
   

How Do I Consolidate Debt?

Each debt consolidation strategy can look a little different depending on the lender, but it often follows a similar process:

1. Review your debt: Look at how much you owe, your interest rates, and how many accounts you have. This helps you understand what you want to combine.
2. Compare your options: There are different consolidation types available. Each option has its own terms and may come with different rates, fees and risks.
3. Choose a solution and apply: Once you decide on an option, apply for the new account or loan. Approval and terms will depend on factors like your credit and income.
4. Pay off existing debts: Use the new loan or account to pay off your current balances. Some lenders handle this for you, while others provide the funds so you can pay balances yourself.
5. Make one monthly payment: After consolidation, you’ll focus on paying the new loan or account, instead of managing multiple payments.
   
    

What Are the Benefits of Debt Consolidation?

This process may offer several potential benefits, depending on your situation:

• Simplified payments: Combine multiple debts into one monthly payment 
• Potentially lower interest: Move high-interest debt to a lower-rate option
• Stay organized: Keep track of fewer accounts and due dates
• Clear payoff timeline: Get a set end date for your debt (some types)

While these could be helpful, they depend on the terms of your new loan and how you manage it.
 

Is debt consolidation a good idea​?

This is a personal decision, and what works for one person may not work for another. Taking time to think through your situation may help you decide if debt consolidation is the right choice.

As you consider your options, think about the answers to these questions:

• Will I qualify for a lower interest rate than what I’m currently paying?
• Will combining my debts into one payment make things easier to manage?
• If the interest rate/APR is only low for a set period of time, do I understand the impact of what it’ll be after that period?
• What’s more helpful: Having a lower monthly payment now or paying less interest on the debt?
• Am I ready to change my spending habits to avoid building more debt?
   

What Are the Risks of Debt Consolidation?

Debt consolidation may be helpful, but it also comes with risks to consider before moving forward:

• Potential for higher total cost: A consolidation loan may lower your monthly payment, but a longer repayment period or added fees could increase the total cost over time.
• Collateral risk: Some loans require collateral, like your home. If you can’t make payments, you could lose that asset.
• Increasing introductory rates: Low introductory or promotional rates only last for a short time. After that, the interest rate — and your payment — will go up.
• Ongoing spending habits: Consolidation doesn’t solve the cause of debt. Without changes to spending, you could build new debt on top of the consolidated loan.
• Disreputable businesses: Some companies advertising consolidation may charge high fees or use risky strategies, like asking you to stop paying creditors. This may lead to penalties or legal issues.
   

Will debt consolidation hurt my credit score​?

The way that this financial strategy affects your credit depends on how you manage the new loan and your existing accounts.

For example, when you apply for a consolidation loan, the lender usually performs a hard inquiry or formal credit check. This may cause a small, temporary drop in your credit score. Some credit scoring models group multiple inquiries for mortgages, auto loans, and student loans made within a short period into a single inquiry. They do this so your score isn’t penalized for comparing rates within that period.

Over time, consolidation may help your credit. Here’s how that might work:

• Lower balances may make payments more manageable.
• Completing on-time payments could build a positive payment history.
   

How do I avoid debt relief scams?

Not all companies offering debt help are trustworthy, so it’s important to know the warning signs:

• Avoid upfront fees: Legitimate companies will never expect payment before providing help. There are non-profit organizations who offer guidance for free.
• Be cautious with unexpected offers: Don’t share personal or financial information with someone who contacts you out of the blue.
• Question “government program” claims: No federal program pays off personal credit card debt.
• Watch for guarantees: No company can promise to settle all your debt or do it quickly.
• Stay in contact with creditors: Avoid any company that tells you to stop making payments.
   

Before working with any company, look up reviews or check with your state consumer protection office.

Does KeyBank Offer Debt Consolidation?

Yes, KeyBank offers several options to consolidate debt. The right choice depends on your financial situation and how you want to manage your payments. Each option works differently and may add benefits like simpler payments or more flexibility.

If you’re considering consolidation, try this debt consolidation calculator to estimate your monthly payment and see how combining your debt might affect your budget. You can also visit a branch or learn more about KeyBank’s debt consolidation options online.