Deciding Which Debts to Consolidate

Consolidating your debts can be a wise move. Rolling multiple balances, especially those with high interest rates, into a single obligation at a lower rate of interest can save you money. It can also help you pay them off faster and lower your total monthly payments. 

However, you must choose the debts you include carefully to ensure you derive an advantage. In other words, deciding which debt to consolidate is key to the successful implementation of the strategy.

Debt Consolidation Methods

Among the avenues available for the consolidation of debt are personal loans, home equity lines of credit, credit card consolidation and debt management. All of these, save debt management, typically require your credit score to be in the “good” range to carry off a consolidation with any hope of success. 

This is because you’ll need a higher score to get a favorable interest rate on those loans. Meanwhile, debt management doesn’t require a new loan to function. Instead a credit counselor will negotiate revised terms with your creditors on your behalf and effect payments using money you deposit with them each month. 

Types of Debt Eligible for Consolidation

Generally speaking, secured debts are not suitable for consolidation under debt management. Because they are backed by collateral, the creditor can simply confiscate the property you put up as security for the loan if you indicate you’re having trouble paying. This leaves credit cards, revolving accounts, medical debt, payday loans, certain student loans and personal loans. 

Credit card consolidation, as the term suggests, can be applied only to credit card debt. This typically takes the form of a balance transfer, in which the outstanding balance of several cards are shifted to one offering a much lower interest rate. Some even offer a zero percent APR on transferred balances if they’re paid in total within a certain time frame.  

Personal loans and home equity lines of credit are the most flexible in terms of the types of debt they can encompass. These can be applied to most any financial obligation. The key is to be certain you have the ability to pay the consolidation off in one to three years at a lower overall rate of interest and ideally with a lower monthly payment. 

Here, we must caution you to be very careful with home equity lines of credit. Unlike the other forms of financing listed above, these loans are secured by an interest in your home. Trading unsecured debt for secured debt, you could lose your house if you can’t service the loan according to the agreement. Thus, the decision as to which debts to consolidate is driven largely by the strategy you choose to implement. 

When Consolidation Makes Sense

As we indicated above, the main thing you want to do is be sure the consolidation will in fact save you money. Ideally it will save you time as well. 

As an example, let’s say you have several credit cards whose interest rates range between 18 to 20 percent. Consolidating these into a loan at seven percent will be beneficial, as long as the amount of time it takes to pay the loan off won’t cost you more than paying off the cards separately. 

Equally as important as deciding which debts to consolidate is making the effort to incur no new debts while you’re paying off the consolidation. Doing so makes it more difficult to be successful. This is especially true with credit card debt, as all of those freed-up credit cards will be very tempting to use.

Don’t fall for their siren song. 

Stick to your plan.