4 Numbers to Know Before You Consolidate Your Debt

Debt consolidation could really improve your financial position. It could help you clear your debts faster, pay less in interest, or make your payments more affordable. You've got a good chance of hitting the mark if you know a few key numbers before you apply for debt consolidation loans. 

So grab a pencil. This won't take long.

Knowledge Is Power, So Get These Numbers

Before applying for a debt consolidation loan, you want to understand your:

• Credit score

• Total unsecured debt (and each debt's balance, interest rate, and payment)

• Credit utilization

• DTI, or debt-to-income ratio

We'll tell you why each number is important, where to find it, and how to use it to get a better debt consolidation loan.

Credit score

Your credit score tells lenders how you're managing your debts now, and how you've paid your bills in the past. Lenders rely on this three-digit number when setting their interest rates and deciding who they'll loan money to. 

There are three reasons it's important to know your credit score: 

1. To avoid wasting time (and piling up score-harming inquiries on your credit report) by applying to lenders whose guidelines aren’t a match for your circumstances. 

2. To shop for loans more effectively—providing an estimated credit score means you can get a meaningful loan quote.

3. To monitor your progress after consolidating. That way, you can stay motivated and pat yourself on the back when you improve.

You can get your credit score from several sources: 

• Credit bureaus Experian and Equifax provide free credit scores. So does FICO®, the company that developed the credit score that most lenders use. 

• Your credit card company may include it on your monthly statement, or let you check it online.

• Your bank may let you check your credit score for free while logged into your account. 

• There are several free credit score websites. 

You can get free copies of your credit reports from the federal government's site annualcreditreport.com. 

Some of the sites mentioned above sell credit monitoring or other services. They are optional. If you reach a screen that asks for your credit card number, close the window and start over. You don’t have to pay for your credit score or credit reports. 

Total unsecured debts

One of the first things any debt consolidation lender is likely to ask you is, "How much do you want to borrow?" So it’s important to go over all your unsecured debts. When you list your debts, note their current balance, interest rate, and payment amount. 

Next, add up your debt balances to get the amount for your debt consolidation loan. And add up your monthly payments so you know the total you're paying now.

1. You may not want to include debts with rates lower than available consolidation loans. It usually doesn’t make sense to move debt to a more expensive loan. 

2. If you can't get a large enough loan to consolidate all of your debts, consider leaving out the account(s) with the lowest interest rate. 

3. Knowing what you're currently paying each month helps you understand how a consolidation loan payment will impact your monthly budget.

Credit utilization

Credit utilization is also called balance-to-limit. It's the percentage of your available revolving credit that you're currently using. For most people, revolving accounts mean credit cards, but they can also be other lines of credit). You want to know your credit utilization because it has a heavy influence on your credit score. It’s a factor that you can improve almost instantly when you consolidate credit card debt. 

To calculate your total credit utilization, you add up all of the limits (available credit) on your credit lines. Then you add up all of their current account balances. Finally, you divide the total account balances by the total available credit. 

• Suppose you have four credit cards and their limits are $1,000, $2,000, $3,000 and $4,000. Your total available credit is $10,000.

• And assume that your balances are $500, $2,000, $2,000 and $1,500. You owe $6,000.

• $6,000 / $10,000 = .6

• Your credit utilization ratio is 60%. 

People with high credit scores generally have very low credit utilization. By paying off all of those credit balances with a personal loan or home equity loan, you could lower your credit utilization. Installment loan debt doesn’t affect your credit scores the same way revolving debt does. Knowing what credit utilization you're starting with tells you how helpful debt consolidation might be for your credit standing.

Debt-to-income ratio (DTI)

The final number to know is your debt-to-income ratio, or DTI. This number tells you the relationship between your income and what you pay toward your housing and your debts each month. 

Here's what's included: 

• Housing (your rent or mortgage payment)

• Payments for student loans, auto loans, personal and other loans

• Minimum payments for every credit card balance or credit line you have

You don't include utilities, food, child care, insurance, medical, or other living costs. 

For most loans, the lender may want you to have a DTI under 43%. Some will allow DTI of up to 50%, and a few will go higher. 

DTI impacts debt consolidation in a couple of interesting ways. If you borrow to consolidate debt, your DTI won't include the payments on any loan paid off through the consolidation. It'll include the new consolidation loan payment instead. 

So if your new loan has a lower payment than the total payments that are going away, your DTI will decrease. This is common with consolidation loans tied to home equity, because the repayment period is long and the interest rate is lower. Extending your repayment period could increase the lifetime interest cost, even with a lower rate, particularly if you add many years to your repayment.

On the other hand, if the monthly payment for the consolidation loan is higher than the total minimum payments of your credit card balances, your DTI will increase. This could make qualifying more difficult, and that's not unusual if you use a personal loan to consolidate your credit cards. Personal loans usually have lower interest rates than credit cards, and you could save a lot by clearing your debts faster. But expect the payment to be higher, because personal loans are designed to be paid off in a few years, while credit card balances can linger for decades. 

Get Your Loan

Once you know what you're currently dealing with, it's easier to find the right consolidation loan. You’ll know what rates to expect, how much you need to borrow, if consolidating could improve your credit score, and how the rate and term you choose will affect your payment.