What Is Debt Consolidation?

You are bombarded by the term constantly when logging into your online banking, but what does debt consolidation actually mean, and is it a good thing?

If you have a credit card then you have, at some point, been offered some kind of special rate to consolidate your debt in one account. But consolidating debt doesn’t just include credit cards. Deb consolidation is essentially taking all or most of your debt and moving it into one account or one loan in order to get a lower overall interest rate and make paying it off easier. Debt consolidation makes a lot of sense for many people who have many debts that are difficult to manage or a credit card or loan with a high interest rate.

How To Do It

There are a few ways to consolidate your debt depending on your individual situation.

Balance Transfer

One way to consolidate your debt is to transfer your credit card balances onto one card with a lower interest rate. This is a great option if you have debt on a few cards and one has a lower interest rate. This can also be beneficial if you have trouble making on-time payments on multiple accounts.

Personal Loan

Another kind of consolidation is taking out a personal loan. In this case you can cover more than just credit card debt. What you do is simply shop around for a personal loan in an amount that will cover your debts with a low interest rate. You use the loan to pay off your debt and then you only have to make one payment a month on the loan itself.

The Good

If you have a credit card with a significant balance and a high interest rate or an outstanding loan with a high interest rate debt consolidation could cut down your interest payments significantly. Paying less in interest will allow you to pay more on the principal balance and pay off the loan faster.

Debt consolidation is also a good option if you have trouble making on-time payments on multiple accounts because it cuts down on that number.

Debt consolidation is relatively low-risk so long as you are able to make the payments on-time.

The Bad

Debt consolidation is not a good choice if you cannot secure a loan or a card with a low interest rate. If you shop around and see that what you are being offered is what you already have then proceeding would not be worth it in the long run.

It is also not a good choice if you tend to fall behind on payments because it could make the problem worse. Additionally if you are using consolidation to pay off credit card debt you may be tempted to keep overspending once you see your credit card balances hit zero.

Final Thoughts

Debt consolidation can be a useful tool in getting your debt under control and digging yourself out of high interest payments. Before you start transferring your debt shop around and see what kind of interest rate you qualify for to make sure it is worth it.

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