Should You Consolidate Your Credit Card Debt?

Is it a good idea to consolidate your debt? You may be able to save money through debt consolidation, but avoid four major risks.
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Debt consolidation is often associated with people who have gotten into financial trouble and need help finding a way out. Is it a good idea to consolidate your debt if you aren’t in financial trouble? Debt consolidation can be a valuable process even for people whose finances are stable. It is just a question of knowing what debt consolidation goals you want to accomplish and what tools to use to reach those goals.

Is Debt Consolidation a Good Option?

In its simplest form, debt consolidation involves borrowing from one source to pay off debts from multiple other sources, but while you are changing creditors, it is also possible to change the nature of the debt so as to change interest rate terms and/or restructure the repayment schedule. This makes it possible to accomplish additional goals:

1. Organize bill paying

If you have been having trouble keeping track of your bills, using one source of credit to pay off the others can narrow down your monthly bill-paying burden and also simplify your communications.

2. Reduce monthly payments by consolidating debt

If your monthly debt obligations have reached the point where making your payments is burdensome, debt consolidation and restructuring could help lower your monthly payments and buy your budget more breathing room.

3. Lower interest rates

If interest rates have come down, or much of your debt is from high-interest credit sources, you may have an opportunity to shift that debt to a lower-interest rate source.

4. Consolidate debt to reduce long-term interest expense

Either by reducing interest rates and/or accelerating your repayments, debt consolidation can help you reduce long-term interest expenses.

You usually cannot accomplish all these goals at once through debt consolidation, but it may be possible to accomplish more than one of them. In any case, it is important to know exactly what your debt consolidation priorities are. Those priorities determine which debt consolidation tools you use and how you apply them.

How to Achieve Debt Consolidation

Here are four tools that can help you achieve the above debt consolidation goals:

1. Consolidate credit cards to one with the lowest rate

Credit card rates vary greatly, so shop for lower-rate cards and shift debt from higher-interest cards to them. This can both simplify bill-paying when you consolidate debt into one card and lower your interest expense.

2. Zero-interest balance credit card transfer offers

These can reduce credit card interest expense. However, watch out for balance transfer fees, and enter into these deals with the goal of paying off your balance by the time the zero-interest period wears off.

3. Use personal loans for debt consolidation

Personal loans are likely to carry a lower interest rate than credit card debt – though if you have run up too much debt, you may have trouble qualifying for a personal loan.

4. Home equity loan/cash out refinancing

Borrowing against equity in your home can often be a lower-interest source of credit to consolidate debt. But don’t put your property at risk unless you are absolutely sure you can meet the payments.

What Are the Disadvantages of Debt Consolidation?

Along with possible debt consolidation benefits come some potential traps. Here are four things to avoid:

1. Heightened interest expense

People under financial pressure are tempted to reduce their monthly payments by spreading the debt out over a longer time. However, this is likely to result in you paying more interest in the long run. Monthly payments need to be manageable but understand that every reduction in those payments is likely to cost more by the time you pay off your debt.

2. Variable payment traps

People who need immediate financial relief often sign on for debt restructuring that makes immediate payments easier to meet at the expense of making future payments more onerous, whether through variable interest rates, balloon payments, or both. Think through both the long and short-term consequences of any debt consolidation plan. Don’t sign up for restructuring unless you have a realistic idea about how to make all the payments.

3. Credit rating damage

Some actions people take to manage debt problems, from opening new credit accounts to trying to renegotiate debt terms, can have negative effects on their credit ratings and thus make debt more expensive in the future.

4. Consolidation “help” rip-offs

Desperate for help, people in debt trouble often turn to predatory debt “counselors” who do more harm than good. There are legitimate, not-for-profit organizations that can provide good advice on debt consolidation. But if someone charges a fee for debt management assistance, advises you to stop paying certain bills, or wants you to funnel all payments through them, steer clear of their services.

Debt consolidation should not be considered an act of desperation. In fact, the more calmly you can enter into it, the greater your chance of success.

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About Author
Richard Barrington, a Senior Financial Analyst at MoneyRates, brings over three decades of financial services expertise to the table. His insightful analyses and commentary have made him a sought-after voice in media, with appearances on Fox Business News, NPR, and quotes in major publications like The Wall Street Journal and The New York Times. His proficiency is further solidified by the prestigious Chartered Financial Analyst (CFA) designation, highlighting Richard’s depth of knowledge and commitment to financial excellence.