If you have multiple credit cards and loan payments, it can be difficult to track multiple payments and balances each month. One way to streamline things is with debt consolidation. This takes multiple debts, typically those with high interest rates, and rolls them into a single payment. So how do you know if debt consolidation is right for you? We’re breaking down the pros and cons below. 

How debt consolidation works

There are two main ways to consolidate debt: a personal loan or a balance-transfer credit card. 

With a debt consolidation personal loan, the bank, credit union or loan lender will convert your debts into one loan payment, typically with a fixed interest rate for a set period of time. This can help simplify the number of payments you’re making each month and often can give you a lower interest rate.

Many credit card companies offer balance-transfer credit cards, allowing you to transfer all your debts to one card. The interest rate is typically low (0%) but only for a limited time and you’ll need to have a strong credit score to qualify (690 or higher). Interest rates tend to go up after the promotional period, which means you might be stuck with higher payments.

The pros of debt consolidation

  • Streamlined finances
    • If you’re someone who is looking to reduce and reorganize a manageable amount of debt so you can pay it off faster, debt consolidation might be a good idea. 
  • Improved credit score
    • Having to make only one payment each month might even help improve your credit score as it lowers the chances of a missed payment.  
  • Lower interest rate
    • Debt consolidation could lower your interest rate, but often only for a set period of time. Be sure to shop around for the best rate and compare lenders. 

The cons of debt consolidation

  • Added fees
    • When you go to consolidate debts, you might be hit with additional fees, like balance transfer fees and annual fees, which just add to your debts. It’s always a good idea to compare lenders to see where you can get the best deal.
  • Longer payment periods
    • Keep in mind that although your interest rate may be lower, you might be paying over a longer period of time. You may end up spending more than if you were just making your individual payments.
  • Doesn’t solve financial issues
    • Debt consolidation isn’t an instant fix for financial issues. It can often lead to deeper debt or encourage increased spending. Focus on budgeting and improving your financial habits as a first step.

The bottom line

Debt consolidation should only be something you consider if you have the cash flow to manage the new monthly payment.