Should I Consolidate my Debt?

Managing personal finances can be overwhelming — tracking multiple credit cards, loans and payments each month. Debt consolidation is often considered a smart option to help meet financial obligations when in these kinds of situations. It’s important to understand what consolidation is and weigh the pros and cons of the debt consolidation methods available when determining if it’s the right choice for you.

What is Debt Consolidation?

Debt consolidation is the process of combining all debts you owe — typically high-interest credit cards and student loans — and paying them off by taking out new funds, either through a low-interest loan or a balance transfer credit card and using the proceeds to pay off your debts. This now leaves the single loan, or credit card consisting of the total amount of your debts to pay.

How Does Debt Consolidation Work?

There are multiple ways to consolidate your debt, but the two most common are through a balance-transfer credit card and a fixed-rate debt consolidation loan.

Balance-transfer credit card: This is a commonly used way to consolidate credit card debt by opening a new low-interest credit card and transferring all other credit card balances onto it. This can be convenient since you only manage one monthly credit card payment, but be aware of hidden transfer and annual fees.

Fixed-rate debt consolidation loan: This process consists of qualifying and taking out a fixed-rate loan and using the proceeds to pay off all other debts — now leaving you with a single loan. Although you can qualify for a loan even with a lower credit score (689 or less), having a higher credit score will help you secure a better interest rate.

There are other ways to consolidate debt through a home equity loan or a 401(k) loan, but these alternatives are often discouraged. When using a 401(k) loan, you’re borrowing against your hard-earned money that you’ve planned to use for retirement. Similarly, a home equity loan can be risky — miss a monthly payment and you could be at risk of losing your home.

Should I Consolidate My Debt?

Everyone’s financial situation is different, what worked for a friend may not work for you. Therefore, it’s important to review your loan and credit card details, interest rates and credit score while determining if debt consolidation is worth it and the right decision for you.

Planning Ahead

Do you have financial goals in mind? Consider working with a financial planner who can help you work toward your goal.