Debt Consolidation: Should you do it?

Debt consolidation is a payment strategy used when you’re dealing with a manageable debt that you want to pay off faster in order to reduce your overall interest expenditure. However, debt is different for every person, and consolidating your debt may not be the best idea depending on your situation. There are various debt consolidation calculators that can help your determine what you can afford, and we’ll start with a few tips that you need to know about debt consolidation:

How does Debt Consolidation Work?

Before you can decide whether or not debt consolidation is an option, you need to understand how debt consolidation works. Typically you can choose to consolidate by using a 0% interest, balance-transfer credit card which allows you to transfer all your debts onto this card and pay the balance in full during the promotional period. Another common option is to get a fixed-rate debt consolidation loan, which allows you to use the loan to pay off the balance of the debt and then pay back the loan in installments.

There are other, riskier options that you may choose to use in consolidating your debt, but for now we’ll stick to these two options.

When is Debt Consolidation a Good Idea?

There are a few scenarios in which consolidating your debt is certainly a good idea, and we’ll go through a few of these starting with: if your total debt, excluding your mortgage, does not exceed 40% of your gross income, then consider debt consolidation. In addition, if your credit is good enough for you to apply for a 0% interest credit card or low interest debt consolidation loan, then you should consider consolidating your debt. Lastly, if your cash flow consistently covers your payments that you’re putting towards your debt, then you should consider consolidating your loan.

When is Debt Consolidation Not a Good Idea?

Just as there are situations and scenarios in which debt consolidation can help you, there are others in which debt consolidation would most likely only serve to hurt you. It’s important to note that debt consolidation is not a one-size fits all tool for reducing your debt and saving your money. As such, it’s also important to note that consolidation probably isn’t worth it if you have poor spending habits. Additionally, if your debt is overwhelmingly large to point that even reduced payments would be difficult to meet, then don’t consolidate! Lastly, understand that a small debt that is manageable doesn’t necessarily need to be consolidated—especially if the amount of money saved by consolidating is minuscule.