Is Debt Consolidation Going to Help You?
Should you consolidate your debts? Well, that really depends on whether or not debt consolidation is going to make repaying your debt easier.
Debt consolidation, after all, is just a tool. In the right circumstances, it can be incredibly helpful. In other circumstances, it can be ineffective or actively damaging.
So keeping that in mind, here are a few key signs that you may want to consider consolidating your debts.
Consider consolidating your debts if:
Your paycheck runs out before you’ve covered every bill
If your income isn’t enough to cover your debt payments, consolidating your debts may help. Ideally, debt consolidation should always offer one or more significant benefits over your current situation. One benefit that's especially helpful is the ability to potentially consolidate multiple payments into a single, smaller payment. A smaller payment should make handling your expenses easier.
One downside: depending on the loan or repayment plan, that smaller payment may mean that it takes longer to pay off the debt, costing you more in interest charges along the way. That may be a sacrifice you have to make, but it can be a costly sacrifice in the long run.
More: How Do I Handle Expenses Between Paychecks?
You occasionally forget to make a payment on one or more debts
Missing a payment is the fastest way to damage your credit score. And the more debts you're juggling, the more likely it is that you'll miss a payment, even if simply by mistake.
If the sheer number of different monthly payments is challenging for you to manage, then consolidation could certainly help. Multiple payments, due at different times of the month, suddenly become one, single payment. You may even be able to automate your payments. Either way, the risk of missing a payment decreases.
More: Tips to Help You Pay Your Debts On Time
You’re using a budget, but you can’t seem to make any progress against your debt
It may be possible that part of what’s holding you back are high fees and interest charges. If that’s the case, consolidation may help reduce interest and jumpstart your progress. First, use our calculator to figure out the average interest rate for the credit accounts you'd like to consolidate, then compare that number to what's being offered by consolidation companies.
Ultimately, you want more of your payments to be going toward the principal of your debt and not toward new fees and interest charges.
More: Understanding the Cost of Interest
You have your spending under control, but your debt is holding you back
If you struggle with debt because you spend too much, it’s probably a good idea to tackle that issue first. After all treating the symptom (the debt) isn't super helpful if you don't do something about the real problem (bad spending habits).
In fact, if you can't control your spending, consolidating your debts may actually give you a false sense of security and simply lead to more debt. It may give you a temporary sense of relief without really addressing the core problem.
That said, if you aren't actively creating new debt, then consolidation may be a good way to finally tackle your existing debt.
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You have a long-term plan to become debt-free
Debt consolidation can help you create breathing room in your monthly budget, but it’s not a small step and definitely not something you should do without thinking through the ramifications. Using debt consolidation to buy yourself time may work for a bit, but eventually that kind of short-term decision making may catch up to you.
In other words, debt consolidation works best as part of a long-term plan to get you out of debt. If you’re using debt consolidation as a stopgap or short-term measure, you run the risk of making things worse. At the very least, you're very likely to end up right back where you started from without much progress to speak of.
More: When is Debt Consolidation Not a Good Idea?
Every circumstance is different and there is no solution that fits every need. That said, if your debts are weighing you down and you’re ready to make a commitment to becoming debt-free, consolidating your debts can be a great way to start that process.
You don't have to do it alone. MMI offer free online financial counseling to help you understand your specific challenges and pick the best solution. Consolidation loan? Debt settlement? Debt management plan? We can help you weigh your options and create a personalized action plan to get started.
