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When Should I Consolidate My Debt?

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debt consolidation

The term “debt consolidation” carries negative connotations for many people, including me. In my mind, consolidation means either (a) dealing with questionable debt consolidation companies or (b) moving a debt problem without dealing with it — both of which are harmful to the user and beneficial for predatory lenders. Yet, consolidation can be helpful if you do it right. Here are cases when you may want to consider consolidating.

By consolidating, I can get a smaller and/or fixed interest rate

Let’s say you have four credit cards with balances and interest rates ranging from 18.99% to 24.99%. Although you do have debt, you always make your payments on time, so you have decent credit and qualify for a loan at 7%. You should consolidate these debts because you’ll get a lower interest rate.

On top of that, if you consolidate using a loan, there’s typically an end point. For instance, a loan with a three- to five-year loan period will be paid off in three to five years, just by making the minimum payment. If you only make the minimum payment on your credit cards, it could take months, years or even decades to pay off your debt, all while accruing more interest than your initial principal.

Another situation where it may be a good idea to consolidate: going from a variable to a fixed interest rate. Variable rates can change with the market, so when the market interest rate goes up, your rates go up, too. Fixed rates aren’t changing, no matter what the market does. They are predictable and consistent, and you won’t have any nasty surprises.

Note: If your debt load is small and manageable — meaning it can be paid off within six months to a year — it may be more trouble than it’s worth to consolidate. If you’ll only save a negligible amount by consolidating, don’t bother. You’ll end up spending quite a bit of time on minutiae.

By consolidating my debts, I’ll be more likely to pay my bills on time

Some of us are simply disorganized. This is a problem when it comes to credit because making on time payments is crucial to build a great credit score. If consolidating your debts means you’ll be able to keep up with payments — because there will be one instead of several — it may be a good idea.

Of course, there are other simple ways to solve this dilemma. You can automate all of your credit card payments to be withdrawn from your checking account each month. Or, if you have cash-flow issues and need a heads-up that money will be leaving your account, you can set phone or email reminders to let you know bills are due.

Warning: Don’t get complacent

Consolidation can make it seem like you’ve made progress on your debt payoff. You haven’t. It’s a good first step, if it’s part of a larger plan to pay off debt, but it isn’t the solution to your debt problem.

If you decide to consolidate debt, make a plan to pay it off at a certain time. Also, stop using the credit cards you’ve consolidated so you don’t run up more debt. If you think you won’t be able to control yourself, close the accounts. But if you have a handle on your finances now, leave the cards open to show potential lenders a long credit history.

OK, I think consolidation is for me, what are my options?

As a general rule, you don’t need debt consolidation companies to help you consolidate. You can do everything they can do, so you might as well save your cash — to pay down your debt, of course! Here are a few options for consolidation:

We’ve written about the pros and cons of using any of the above for consolidation, which you can find by clicking on the links. None will direct you to a debt consolidation counselor.

Bottom line: Consolidate your debt if you can get a loan at better terms and/or it will assist you in making payments on time. Just make sure this consolidation is part of a larger plan to get out of debt and you don’t run up new balances on the cards you’ve consolidated.

Woman stressed about credit cards image via Shutterstock