Debt consolidation can be a powerful tool—or a costly mistake. Here's how to know which one you're getting into.
What Is Debt Consolidation?
Taking multiple debts and combining them into a single loan with (ideally) a lower .
| Before | After |
|---|---|
| Credit card 1: $5,000 @ 22% | Personal loan: $15,000 @ 10% |
| Credit card 2: $4,000 @ 19% | |
| Credit card 3: $6,000 @ 24% |
The appeal: One payment, lower rate, faster payoff.
When Consolidation Helps
Do This
Good candidates for consolidation:
- Multiple high-interest debts (15%+ APR)
- Good enough credit to get a better rate
- Committed to not running up new debt
- Want simplicity and a clear payoff date
The math must work:
- New rate must be lower than weighted average of current rates
- Total cost (including fees) must be less than current path
- Monthly payment should be manageable
When Consolidation Hurts
Avoid This
Bad reasons to consolidate:
- To free up credit cards to spend more
- The new rate isn't actually lower
- You're extending the term so long you pay more interest
- There are high origination fees
- You're using home equity (turns unsecured debt into secured)
Consolidation Options
Balance Transfer Card
- Best for: $5-15k of credit card debt
- Rate: 0% for 12-21 months
- Fees: 3-5% of transfer amount
- Risk: High rate after promo ends
Watch Out
You MUST pay off the balance before the 0% period ends. Set up auto-payments to guarantee it.
Personal Loan
- Best for: $5-50k of various debts
- Rate: 7-20% depending on credit
- Fees: 1-8% origination
- Term: 2-7 years
Debt Management Plan (through credit counseling)
- Best for: Can't get approved elsewhere
- Rate: Reduced by creditor agreements
- Fees: Low monthly fees
- Note: Not a loan—a structured payment program
The Calculation
Current debt:
- Total: $15,000
- Weighted average rate: 22%
- Minimum payments: $450/month
- Time to payoff: 47 months
- Total interest: $6,100
Consolidated:
- Total: $15,000 + $450 fees
- Rate: 10%
- Payment: $450/month
- Time to payoff: 38 months
- Total interest: $1,800
Savings: $4,300
Run this calculation for your specific situation before deciding.
The Critical Rule
Watch Out
Never consolidate unless you address the root cause.
If you consolidate $15,000 in credit card debt, then run the cards back up again, you've doubled your problem.
Before consolidating:
- Cut up or freeze the credit cards
- Build a budget that prevents new debt
- Create an emergency fund (even a small one)
- Address the spending habits that created the debt
Using Home Equity
Some people consolidate with a loan or HELOC. This converts unsecured debt to secured debt.
| Pros | Cons |
|---|---|
| Lowest rates (7-9%) | Your house is collateral |
| Tax- interest | Foreclosure risk if you can't pay |
| Longer terms available | Turns short-term debt into long-term |
Avoid This
Using home equity for credit card debt is risky. If you can't pay, you lose your house. Only consider if you're extremely disciplined.
After Consolidation
For aggressive debt payoff strategies, our Wealth tier covers:
- Tax-efficient investing while paying off debt
- Balance between debt payoff and wealth building
Quick Win
List all your debts with balances and rates. Calculate your weighted average rate. Then check if you qualify for a personal loan at a lower rate—many banks offer free pre-qualification without hurting your credit.