THE BLOG

What's the Best Way to Consolidate Debt?

02/27/2015 11:04 am ET | Updated Apr 29, 2015

By Jocelyn Baird, NextAdvisor.com

We are a nation of people in debt, and it doesn't seem to be getting any better. According to data released by the Federal Reserve this February, Americans' revolving, non-mortgage credit increased in December 2014 to $3.3 trillion -- while non-revolving credit (such as student and auto loans) rose to $2.42 trillion, as reported by USA Today. Whether you owe student loans or carry a balance on your credit cards, the impact of debt can be felt in many areas of your life. If your debt comes from multiple sources, it can make things much trickier as you juggle multiple payments each month. Studies released by Urban Institute in July 2014 showed that 35 percent of Americans -- roughly one out of three -- are so behind in their finances that they have debt in collections. Many people become overwhelmed by their debts, but they don't have to be. One way to help alleviate some of the strain is to consolidate debt from multiple sources.

What is debt consolidation?

Basically, debt consolidation takes debt you have from more than one source, such as multiple credit cards, and combines it into one lump sum. This makes it easier to pay off debt because you are no longer bound to multiple payments and due dates each month. There are two primary ways you can consolidate debt: balance transfers and personal loans. What's the difference between the two?

Balance transfers

If you are looking to only consolidate credit card debt, a balance transfer is a great option. Balance transfers are quite simple -- all you have to do is request a balance transfer once you have signed up and been approved for a new card. The trick is to look for a card that offers 0 percent on balance transfers for an extended period of time or reduced APRs on balance transfers. This way, you can eliminate or lower the interest you're paying by transferring your balance from one or more cards where you are paying a high interest rate to one with a lower interest rate -- or none at all!

Should I look for 0 percent or reduced APR? Most cards offering a 0 percent introductory APR have a 12 to 18-month time frame. If you don't believe you can get your debt paid in time, it would be better to find a card with a reduced APR so that you don't find yourself paying a high interest rate when the 0 percent intro APR ends.

Which cards are best to consolidate debt? There are a number of great cards for balance transfers, but some of the best for those looking to consolidate debt include:

  • Chase Slate is a great choice for credit card debt consolidation because not only does it offer an impressive 0 percent intro APR for 15 months, but it also doesn't charge an annual fee or a balance transfer fee -- so long as you complete your balance transfer within the first 60 days your account is open. After 60 days, there's a $5 or 3 percent transfer fee (whichever is higher), which still isn't bad.
  • For the longest 0 percent intro APR, look to Citi Simplicity (a NextAdvisor advertiser), which offers an 18-month 0 percent intro APR on balance transfers and purchases. This card also has the benefit of no fees for anything -- not even late fees. There is a balance transfer fee of either $5 or 3 percent of your total transfer amount, whichever is higher.
  • Barclaycard Ring Mastercard is ideal for those who have a hefty amount of debt to consolidate that they likely won't be able to pay off in 18 months or less. Although it doesn't offer a 0 percent intro APR, the card does feature a low ongoing APR of 8 percent on purchases and transfers. This card also pays you with 1 percent cash back on the total transferred amount when you transfer a balance within the first 60 days. Add that to no balance transfer fees ever, and you've got a great card option for debt consolidation.

Personal loans

Since there are other forms of debt, people might be looking for an option other than a balance transfer. Some credit card debt may be too much to transfer to another card, which is where personal loans step in. Taking out a loan from a bank is a long, complicated process that involves a lot of paperwork -- and it usually requires some type of collateral to secure the loan. Personal loans provide another option for those who are looking to manage their debt. These services offer competitive interest rates and unsecured loans with fixed interest rates. This can be beneficial for those who are looking to consolidate debt because your interest rate will not change, so you can trust that your first payment will be the same as your last. Personal loans are multipurpose, and the money can be used as needed to pay the debts and then pay off the loan -- hopefully with a smaller monthly payment and a longer repayment period.

Which personal loan services are best for debt consolidation? Since personal loans are multipurpose, most work for people looking to consolidate debt. What matters is whether you can get approved for the entire requested amount and an APR that works for you.

Lending Club is a peer-to-peer lending service that offers a loan process which is quite different from the traditional bank experience. After submitting an application and getting approved, you can post a listing to request money. These requests are filled by individuals and businesses that lend money through Lending Club as a form of investment. Lending Club offers APRs as low as 6.68 percent (up to 29.99 percent), and you can request a maximum loan amount of $35,000. If you don't get funded for the entire requested amount, you can either accept or re-list it to try again.

Need to consolidate a significant amount of debt? Lightstream offers astonishingly low interest rates for debt consolidation loans (5.99 percent - 9.99 percent) and has a maximum loan amount of $100,000. The downside is that you need to have excellent credit to borrow. If you are simply looking to consolidate debt and have otherwise stellar credit, Lightstream is a great option.

Borrowers with poor-to-average credit should look to AvantCredit for a personal loan option. While the rates can be high if your credit isn't great, those looking to turn their financial lives around will benefit from regular reporting of on-time payments to the credit bureaus. AvantCredit offers unsecured loans with a maximum loan amount of $20,000 and APRs starting at 19 percent.

To learn more about these lending services and others, read our in-depth personal loan reviews to find out which is the best option to consolidate your debt.

This blog post originally appeared on NextAdvisor.com.

Top 8 Financial Worries Of Americans