Is It Bad To Consolidate Debt? 3 Things To Watch Out For

Whether you have become overwhelmed by a combination of debts such as credit card, medical and personal loans, or you simply got lost in your credit card debt, you are among the $16.15 trillion people in debt in the United States. Even credit cards for fair credit can become an overwhelming source of debt if you let them get away from you. While the choice to consolidate debt might be right for some, it may not be the answer for everyone. There are several things to keep in mind if you are considering consolidating your debt. Read on to learn more about how debt consolidation works and a few things you should watch out for when making your choice. 

What Is Debt Consolidation?

Debt consolidation is the process of combining your debts into one payment, often through a debt consolidation loan. There are different types of debt consolidation such as those used for a variety of debt types including medical bills, credit card bills and personal loans. Others are specific to credit card debt, consolidating only your credit card bills into one loan. The loans can come in many forms with different interest rates and repayment schedules. Here are three things that you should watch out for when considering a loan to consolidate debt:

1. Watch For Additional Fees

While consolidating your debt into one loan and one monthly payment might help reorganize the debt it could also come with a price. Depending on the loan structure that you choose, there may be additional fees such as an annual fee, origination fees, balance transfer fees and even closing costs for completing the loan process. When discussing the options be sure to ask about all of the fees that could be imposed. Make sure that all of the fees are laid out for you in black and white before you decide on a consolidated debt loan.

2. Higher Interest Rate And Longer Term

Putting all your debt eggs into one basket may be more convenient and appear to give you a fresh start; you may also end up paying a higher interest rate based on your credit history. In addition, depending on the amount of the debt being consolidated, you may also have a longer loan term than you might for each individual debt. This could mean that you are paying more for your debt in the long run. If you are still considering a debt consolidation loan, you may want to hold off long enough to improve your chances of a better deal by plugging away at some of the smaller debts on your credit. This could change your credit score significantly and provide you with the ability to get into a better loan product with a lower interest rate and better terms. 

3. A Consolidation Loan Could Adversely Affect Your Credit

In some cases, taking on a new loan could impact your credit rating. It would mean taking on a new loan and could change things like your debt to income ratio, your credit usage and your credit score. If you are unable to keep up with your new loan, it could mean your credit rating will suffer. It’s very important that the debt consolidation loan that you choose doesn’t do more harm than good when it comes to your credit report. Additionally, removing all of your other debts from your credit and replacing it with only one credit source, could also be damaging. Interestingly enough, having too few credit accounts can be as harmful as having too many. 

Before you decide to go the route of debt consolidation to pay off credit card debt, medical bills or personal loans, take the time to thoroughly research the options. There are other options other than debt consolidation loans that may work for your situation such as reducing your spending with a budget, paying off the lower debts first or even working on paying off the debts with the higher interest rate first. Creating a personal financial plan including all of your income and your debts is one of the first steps to making sure you are taking advantage of the best options for your situation. This will paint a clear picture of what you are working with. 

Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author.

He’s been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What’s Your Story, and more.

He loves to share his personal finance tips and money management wisdom with others on his website,, to help them find financial freedom.

Leave a Reply

Your email address will not be published. Required fields are marked *