Should you consolidate your debt? 3 questions to ask yourself first


Debt can be a useful tool, allowing you to make significant, life-changing purchases like cars and houses. Too much of it also can also be life-changing – and not in a good way.

When your debt becomes too high relative to your ability to stay on top of it, it’s easy to find yourself on a virtual hamster wheel, making minimum payments to stay in good standing, but never reducing your overall debt load.

Fortunately, solutions do exist, and one of the most common strategies is to consolidate your debt. This means moving as many of your credit card accounts and loans to the fewest number of payments. This could mean taking out one loan to pay off all of your credit cards and outstanding loans. Or you could start by moving higher-interest rate credit card accounts to one lower-rate credit card.

Here are 3 questions to consider when thinking about debt consolidation and whether it’s right for you:

Will consolidation save you money or cost you money?

Many consumers, especially younger adults just beginning to live independently, often have at least one credit card with a high interest rate – sometimes these rates can be well above 20 percent! The more of these types of cards you accumulate, the harder it can be to keep up with the minimum payments.

At that point, it might make sense to jump on offers to consolidate your credit card accounts onto one lower-interest rate card. Many credit cards will offer zero-percent or low-interest balance transfers to let you consolidate. This lets you make one payment at a lower interest rate for an introductory time.

But that phrase – an introductory time – is key to remember. Many of the low rates these new cards offer are only good for a set period. After that, the interest rate on your new card will probably move higher. And if you haven’t paid off your entire transferred balance before your “teaser” rate expires (usually 12 to 18 months), your new finance charges could jump as high as the old cards you just paid off. If you don’t think you can pay your entire balance within the introductory period, try to hold out for a card with a low fixed rate.

Debt consolidation loans work much the same way (the actual loan is just a regular personal loan, but people call it a consolidation loan to describe what the money is primarily being used for). Many banks, credit unions, and installment loan lenders will offer loans that collect all of your debts into one loan payment, simplifying how many payments you make to different creditors – and at lower interest rates than you’re currently paying.

With loans, too, it makes sense to consider whether you’re getting an introductory rate that’s going to rise after a fixed time. Consolidation loans may also include hidden fees or costs that you wouldn’t have to pay if you continued making your other payments. One good tip is to add up what you’re paying now across accounts and make sure it’s less than what you’d pay over the life of the loan, including fees.

Does consolidation help you make timely payments?

One of the biggest advantages of consolidating debt is that, with fewer creditors to pay, you’re more likely to pay on time, which is one of the most important ways to maintain or build a good credit score. Having just one payment to make can certainly simplify your debt paydown strategy.

On the other hand, consider whether having just one monthly payment will change how you think about your debt load. Some people with high credit card or other debt payments may be more focused to pay them down one by one, which reduces interest payments over time. If you consolidate your loans to a more manageable monthly payment, will you still be as aggressive in paying off your total debt, or are you more likely to make only minimum payments? The difference can mean a lot of money over the life of the loan.

Is consolidation helping you get out of – or getting you into even more – debt?

It may sound like common sense, but it’s important to remember that debt consolidation is still debt – you’ve only transferred the amount of debt you already have to lower your payments and make the payments easier to make. And while it might seem like you’re on your way to paying off your debt, you technically haven’t reduced any of what you owe.

And while it’s a good first step, it’s not a cure-all. The reality is that most consumers who choose to consolidate their debt end up with more debt a few years later, in some cases maxing out the credit cards that were freed up by the consolidation. Tweet: "The key is to make sure that after consolidating debt, you don’t incur additional debt that you can’t pay off"

So should you consolidate your debt? The verdict… it really depends on you

There’s no question that debt consolidation should save you money and help you make timely payments, but the most important factor to consider when consolidating debt is you: don’t let debt consolidation provide you a false sense of security – or permission to yourself – to take on additional debt. You’ll need the discipline and grit to pay off your consolidated debt as quickly as possible.

Set a goal and create a schedule to pay off your consolidated debt by a certain time, and then stick to it. If you don’t feel that’s not possible, then the risk of taking on additional debt might not be worth the potential benefits. Each person’s situation is different. Ask yourself if there’s anything you need to change about your financial habits in order to make debt burdens a permanent part of your past.

At MoneyLion we offer personal loans that can help you consolidate debt, but make sure any loan you get for consolidation purposes meet the above three criteria.

If you feel a consolidation loan is for you, then we welcome you to apply for a loan at to get an idea of what loan terms you’ll be eligible for (the initial application won’t impact your credit score – we only do a soft pull) and whether a loan makes sense for your particular situation.

Or, if you’re looking to better manage your finances like tracking your expenses and getting tips on how to save money, try our free mobile app and let us know how you like it.

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