Would consolidating your debts actually save you money?

Does debt consolidation save money?

Only if the new rate and term genuinely reduce your total cost. It's easy to be fooled by a lower monthly payment: stretching the term longer can shrink each payment while actually increasing the total interest you pay over the life of the loan. Always compare total interest paid under the new loan against what you'd pay continuing your current debts, not just the monthly payment amount.

What are common ways to consolidate debt?

Typical options include an unsecured personal loan used to pay off several balances at once, a balance transfer credit card offering a promotional low or 0% rate for a limited time, or a home equity loan or line of credit. Each comes with different qualification requirements, fees, and risks — a home equity option in particular puts your home up as collateral, which a personal loan or balance transfer card does not.

Does consolidating hurt my credit score?

There's often a small, temporary dip from the new account and the hard credit inquiry involved in applying. Over time, though, consolidating can help your score by lowering your overall credit utilization and simplifying multiple due dates into one on-time payment — as long as you avoid running the newly paid-off cards back up afterward.

What if I don't qualify for a lower rate?

If the best rate you can get isn't meaningfully lower than the blended rate across your current debts, consolidation may not help much financially even though it simplifies your payments into one. Run the numbers above with your actual offer first, and consider working on your credit before applying if you have time to wait for a better rate.

Worked example: four debts of $5,000, $3,000, $2,000, and $1,000 total $11,000, currently costing $450 a month combined. Consolidated into a new 5-year loan at 9%, the new payment is $228.34 a month — a savings of $221.66 a month — with $2,700.51 in total interest over the new loan's life.