A man researches the benefits of consolidating debt on a laptop computer.

The Value of Debt Consolidation and Its Benefits


Consolidating debt could be a great way for you to lessen payments and save on interest.

With overall interest rates near a 15-year high, the cost of paying for consumer debt has also increased in an economy where prices for everything, from groceries to school supplies, are sharply higher than a year ago. Now may be the time to review your debt, particularly high-interest credit card balances, to learn if debt consolidation is a good option to save money.

Debt consolidation usually means taking one loan to pay off all the balances from your existing debts, such as credit cards or a car loan, and ending up with just one monthly loan payment. There are several key aspects to debt consolidation to consider:

1. Make a List of Bills and Current Debt

Gather all your bills and itemize all your debt, starting with the debts that charge the highest interest. The highest-rate credit cards should be paid off first with the proceeds from a lower-interest loan.

2. Look Into 0% Credit Card Offers

Many credit card companies offer money-saving deals for new customers who take out a new credit card and transfer their old debt to the new card. Typically, an introductory discount will offer 0% annual percentage rate (APR) interest, over an initial period ranging from six months to two years. While the cardholder must still make monthly payments, all those payments during the introductory 0% APR period usually pay down the balance, and nothing is spent on interest.

3. Simplify Payments With a Single Loan

Consumers with numerous credit accounts are faced with a stack of bills filling the mailbox. A single personal loan to pay off all old debts can reduce this stack of paperwork to one simple monthly payment. Depending on the terms of the loan, monthly repayments could also be reduced. Using Fifth Third’s loan calculator, you can see what your new monthly payment might look like.

4. Using Home Equity Loans

Your bank can offer you a home equity loan or a home equity line of credit (HELOC). Typically, you must have at least 20% equity in your home. That is, the outstanding mortgage cannot exceed 80% of the home’s current market value. As this loan uses your home as security collateral, it usually charges lower interest rates than other lending products. In many cases, the interest on the loan is tax-deductible, but you should consult your accountant to see how to qualify for the deduction.

5. Become Debt-Free Sooner

A substantial interest expense savings could mean you pay back all of your debt sooner. Less money spent on interest expenses means more money left to pay off the principal sooner rather than later—and more money left for other everyday expenses.

6. Transfer Fees

Many credit cards that offer an initial period of 0% APR will charge an upfront fee to transfer your balances to the new card. An example of such a fee could be $5 or 3%—whatever is greater. For example, to transfer an old balance of $5,000, there will be a lengthy introductory period when no interest is charged on the transferred balance; but the new card might charge a $150 transfer fee.

7. Watch Your Credit Report

Certain types of debt consolidation should be approached with caution, particularly anything related to "debt forgiveness." Debt forgiveness usually means that a company will offer to renegotiate your debt with your credit card company and try to secure a reduction in the balance owed. This may seem like a good idea at first. But that company negotiating on your behalf will charge a hefty fee. In addition, your credit score may suffer if the card company forgives any part of your debt, which could create challenges getting new credit in the future.

8. Beware of Misleading Debt Reduction Ads

Offers that are way too good to be true, especially on-the-spot quick cash in an emergency to pay past-due bills, should be considered with extreme caution. Some lenders, such as storefronts offering fast cash, charge excessively high fees that can increase your debt rather than reduce it.

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