Is debt consolidation a good idea? What to consider

Paying off debt is a common item on many people’s financial to-do lists. But with so many debt repayment strategies to choose from, it’s not always easy to find the best tactic.

Debt consolidation is one common strategy for paying off debt. But how does it work? And how do you know if you’re a good candidate for debt consolidation? Learn more about common considerations and potential pros and cons in this guide.

Key takeaways

• Debt consolidation combines two or more debts—like credit card balances or installment loans—into a single monthly payment.
• Some of the most common debt consolidation methods include debt consolidation loans and credit card balance transfers.
• Consolidating debts could make payments more manageable and save you money.
• It’s important to do your research and consider debt repayment options before moving forward with the consolidation process.

Debt consolidation means you combine—or consolidate—various debts using a new line of credit. The process won’t erase what you owe. Instead, it combines some or all of your balances into one account with a single payment. It could also help you lower your overall interest rate and pay off your debts faster. 

There are two common ways by which you can consolidate your debts: a debt consolidation loan or credit card balance transfer. 

Debt consolidation loans work by combining existing debts into a single monthly loan payment. In some cases, a debt consolidation loan may come with a lower interest rate or better repayment terms compared to your existing debts. That means you could potentially save money on interest or manage your payments more easily.

The debt consolidation loan process is relatively simple. If you’re approved, you can use the funds to pay off your balances. Then, you begin making fixed monthly payments on your new loan until you’ve paid it off in full.

Using a credit card balance transfer is another way to consolidate debt. Balance transfer credit cards may come with temporary low or 0% introductory annual percentage rates (APRs). If that’s the case, you could begin paying off your balance without incurring additional interest charges.

But keep in mind that missed or late payments could cause you to lose the low or 0% intro rate. Make sure you understand the disclosures of your balance transfer prior to consolidating your debt. 

Some balance transfer cards require you to pay a balance transfer fee. In most cases, the fee is a percentage of the amount transferred or a fixed number—whichever amount is higher. And some credit card companies may only allow you to consolidate credit card balances.

It’s also worth noting that you typically can’t transfer balances between cards from the same issuer.

Debt repayment and consolidation aren’t a one-size-fits-all tactic. If consolidating debt helps you lower monthly payments, reduce interest rates or simplify payments, it might be worth considering.

But debt consolidation can also have disadvantages. So before you decide to consolidate your debts, consider some of the pros and cons:

Here’s a look at some of the ways borrowers might be able to benefit from debt consolidation:

• You could save money. You could transfer your balances onto a credit card with a low or 0% promotional APR. Or you might find a debt consolidation loan with a lower interest rate than that of your older debts. Either way, paying less interest could save you money over time. 
• You could simplify your payments. Moving all your debts into one account means you’d only have to manage one monthly payment. This may also help you build a good credit history by reducing the risk of a late payment—or missing a payment altogether. Late or missed payments can stay on your credit reports for years and negatively impact your credit.  
• You could pay off your debt faster. If consolidation means you’re paying a lower APR, you might be able to put more money toward paying off the principal. And that could put you on a faster track to paying it off.
• You could boost your credit scores. Applying for a debt consolidation loan or balance transfer card could temporarily lower your credit scores. But if you make consistent, on-time payments and lower your credit utilization ratio, you could improve your credit scores over time.

Here are some things to keep in mind when it comes to debt consolidation: 

• You might not get the deal you want. The better your credit scores, the better the terms of a debt consolidation loan or credit card balance transfer might be. That means bad credit scores could result in terms that might not be any better than those of your existing debts. And if you’re consolidating your federal student loans, you might have to give up some of the benefits that come with them, like principal rebates or some loan cancellation benefits.
• You could get hit with extra charges. The fees and costs associated with different types of debt consolidation might add to your expenses. Balance transfers, for example, sometimes come with an extra fee. You could also face loan origination fees, account maintenance fees or closing costs.
• Your introductory APR may change. It could revert to a higher APR after an introductory period—increasing your monthly payment if you can’t pay off the debt before your introductory period ends. 
• Your credit scores could take a temporary hit. New credit applications could affect your credit scores. So could a change in your credit utilization ratio.
• It’s not a cure-all for debt. Before beginning the debt consolidation process, make sure you understand how you got into debt in the first place. If unexpected expenses or irresponsible spending habits caused your debt to accrue, consolidating your balances may not help you get out of debt unless you make and stick to a realistic budget.
• Debt consolidation might not save you money. Debt consolidation can help lower your monthly payment, especially if you qualify for a loan or balance transfer card with a lower interest rate. But if a debt consolidation strategy reduces your monthly bill by extending your repayment term, you could end up paying more over time.

Ultimately, deciding if debt consolidation is right for you depends on your financial situation and personal circumstances. But it could be a good idea for you if:

• You want to simplify your monthly payments. Debt consolidation combines some or all of your debts into a single payment—minimizing the monthly juggling act. And debt consolidation loans may come with a fixed monthly payment and predetermined repayment term. That means you’ll know exactly when your payments are due and when your balance will be paid off.
• Your credit scores are in good shape. If you have good credit scores, you could be a good candidate for debt consolidation. Lenders are more likely to approve you for a better rate on a loan or balance transfer card if you have higher scores. And a lower rate could reduce the amount of interest you’ll pay over time.
• You can afford the monthly payments. It’s important to ensure you can afford the monthly payments that come with a debt consolidation loan or balance transfer. Otherwise, your financial health could take a hit.

If you’re looking for a way to make getting out of debt more manageable, debt consolidation can be an effective solution. But it may not be right for everyone.

It’s important to do your research and consider debt relief and repayment options before moving forward with the consolidation process. You can also learn more about ways to consolidate credit card debt to find the best option for your needs.