Why Debt Consolidation Doesn’t Work (2024)

Why Debt Consolidation Doesn’t Work (1)

Debt consolidation is a big business in the U.S. Many people believe it’s a great tool to use for getting out of debt. But is consolidating your debt really a good option for people who really need a solution for getting rid of debt for good?

In this article, I’ll show you exactly what debt consolidation is, why I believe it’s not a good idea, and what other options you have for getting out of debt that will work much better. I’ll also provide you with a list of great resources to help get you moving in the right direction so you can eliminate debt for good.

What is Debt Consolidation?

Debt consolidation is simply bringing together all your debt into one lump sum at a cheaper interest rate, and paying it off with one monthly payment, instead of sending money to multiple creditors every month. There are two different ways you can consolidate your debt:

  • Do It Yourself- Take out a personal loan or a home equity loan to pay off all your outstanding debt, whether that'sstudent loansor credit card bills . You might be able to get a lower interest rate, and you’ll only have one payment to make each month as opposed to many payments on multiple loans.
  • Hire Someone to Consolidate Your Debt- Pay a debt consolidation company to handle your debt payments for you. They negotiate “better” terms with your creditors, and you pay them one lump sum debt payment every month plus their fee. Then they pay your creditors for you.

Why Debt Consolidation is Not a Good Idea

At first blush, debt consolidation seems like a good idea, especially if you’re in a desperate financial situation. But here’s the deal- Consolidating your debt doesn’t really solve your problem in the long run. In fact, it will cost you more money. Let’s explore why below.

Do It Yourself Debt Consolidation

When you consolidate debt on your own by taking out a loan, it may lower your payment, but it does nothing to change the behavior that got you into debt in the first place (more on that later). And if you use a home equity loan to consolidate your debt (God forbid), you’re putting your house at risk, which is an unwise move.

Read here for more details on why that’s a bad idea

Hiring a Debt Consolidation Company

If you hire a debt consolidation company to help you with the process, they will negotiate new terms with your creditors, which will save you several hundred dollars a month on your debt payments.

Sounds good, right?

What they usually don’t tell you is that even though they might be able to get some of your interest rates lowered, the main method they use to get your payments lowered is to extend the payoff time of your loans.

The net result is that instead of paying off your debt in, let’s say, 2 years, it will now take you 5-6 years. Because of that, you actually end up paying a lot more money in interest and monthly fees because of the extended payoff time.

In the end, you end up paying thousands extra in interest and fees to have your debt consolidated.

Why Debt Consolidation Doesn't Work

There is one more pitfall to using debt consolidation that you don’t always hear about, and in my opinion, it’s the biggest pitfall of all. When it comes down to it, if you want to get out of debt, there has to be a change in your mindset and behavior when it comes to money.

Most people that are deep in debt get there over a long period of time by financing their life through credit, car payments, and other forms of consumer debt that added up over time until it became difficult to manage making the payments (sound familiar?).

Debt consolidation does absolutely nothing to address how you got into debt in the first place, and statistics show that the majority of people that go through debt consolidation get back into debt soon after.

Why does that happen?

It’s because there is no behavior change involved in the process.

If you want to get out of debt permanently, the first two things I recommend are that you have to:

1. Get Mad

2. Get Naked

Get Mad at Your Debt

You have to get so mad at your debt that no matter what happens, you swear you’re never going back. You have to get your emotions involved and get intense about your decision to fix your financial problems permanently.

Get Naked

Then you have to get naked. Yes, I know that sounds a little strange. Getting naked simply means that you’re going to go naked with credit. It means that you now recognize credit is not your friend, and that you’re going to swear off using credit for good.

Just like being naked and exposed, not using credit is uncomfortable at first. But once you learn to use only cash to finance your life, things start to change, and you discover that you just don’t need that credit you once thought was so necessary.

Yes, you can still be prepared for emergencies without a credit card.

You can still buy a car without a loan.

You can still have everything you need using cash.

Join Me In My Nakedness!

Sorry, I don’t mean for that headline to sound creepy! I haven’t used credit in almost a decade now, and it’s one of the best decisions Angie and I ever made!

You can join me and thousands of others on the debt free journey by simply having a plan. It doesn’t take any special talent or ability, it just takes time, hard work, and a willingness to make your situation better, no matter what it takes.

Blog Posts

You can start by reading my extensivearticle that will lead you through every single step it takes to get out of debt permanently, without using the illusion of debt consolidation. You can find it here:

How to Get Out of Debt- The Ultimate Plan for Getting Out of Debt Even if You Have No Money

Books

There are also a couple of great books available that I recommend:

“Financial Peace” by Dave Ramsey

“The Total Money Makeover” by Dave Ramsey

The CFF Online Course

And of course, if you want a much more in depth teaching on how to make a plan to get out of debt, how to get your spouse on board financially, change your family tree, change your behavior with money, and more, you can check out the Celebrating Financial Freedom Online Course.

Click here to get more info.

You can even sign up for the free mini course!

When it comes down to it, debt consolidation rarely works to get you permanently out of debt, but having a plan does. I’ve been there, made a plan, and got it done. I know you can do it too!

Question: Have you ever tried debt consolidation? What kind of experience did you have?

Additional Links:

Why Debt Consolidation Doesn't Work- Yahoo.com

The Truth About Debt Consolidation- DaveRamsey.com

10 Debt Consolidation Myths- Bankrate.com

5 Steps for Getting Out of Debt You Can Do Right Now

Photo Credit: Keith Williamson via Compfight cc

Why Debt Consolidation Doesn’t Work (2024)

FAQs

Why doesn't debt consolidation work? ›

It won't solve financial problems on its own

Consolidating debt doesn't guarantee you won't go into debt again and won't eliminate your current debt or underlying financial habits. If you have a history of living beyond your means, you might do so again once you feel free of debt.

Why am I declined for debt consolidation? ›

If your debt consolidation loan was rejected, it means lenders felt uncomfortable with your ability to repay what you borrow. Look at things from a lender's point of view. They want to know what are the chances you will pay the money back?

Why does debt consolidation typically not save money? ›

You can't land a lower interest rate

If the consolidation loan's interest rate is higher, you'll likely end up paying more in interest over the life of the loan. This would make your overall debt more expensive in the long run.

Is debt consolidation a mistake? ›

If you qualify for a lower interest rate, debt consolidation can be a smart decision. However, if your credit score isn't high enough to access the most competitive rates, you may be stuck with a rate that's higher than on your current debts.

What is a disadvantage of debt consolidation? ›

Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.

Does everyone get approved for debt consolidation? ›

You'll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn't automatically equal a denial, as some lenders offer loans for bad credit, the borrowing costs will likely be higher.

How much debt is too much to consolidate? ›

Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income. Your credit is good enough to qualify for a credit card with a 0% interest period or low-interest debt consolidation loan.

What is the lowest credit score to get a consolidation loan? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

What score do you need to consolidate debt? ›

Generally, borrowers with scores of 740 or higher will receive the best interest rates, followed by those in the 739 to 670 range. If your credit score is lower than 670, debt consolidation may not be a good option for you.

Can I still use my credit card after debt consolidation? ›

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

What is the quickest way to pay off credit card debt? ›

Strategies to help pay off credit card debt fast
  1. Review and revise your budget. ...
  2. Make more than the minimum payment each month. ...
  3. Target one debt at a time. ...
  4. Consolidate credit card debt. ...
  5. Contact your credit card provider.

What is the best debt consolidation company? ›

Best Debt Consolidation Loans of May 2024
  • Achieve – Best for Paying off Credit Card Debt.
  • Discover – Best for No Interest If Repaid Withing 30 Days.
  • Best Egg – Best for Debt Consolidation Perks.
  • LendingClub – Best for Peer-To-Peer Lending.
  • LightStream – Best for Low Interest Rates.
  • SoFi – Best for Large Loan Amounts.

Can I be denied debt consolidation? ›

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.

Does consolidation ruin your credit score? ›

Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score.

How long does debt consolidation stay on your record? ›

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

Does debt consolidation ruin your credit? ›

Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score.

Does consolidation hurt your credit? ›

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

What are three disadvantages to consolidating your loans? ›

Disadvantages of Consolidating
  • Longer Repayment Period. ...
  • More Interest. ...
  • Loss of Certain Borrower Benefits.

Is it smart to take out a personal loan to consolidate debt? ›

A personal loan can make a lot of sense for debt consolidation, but make sure to consider all the options and tools that may be available to you. Getting out of debt requires you to stop racking up more bills you can't pay.

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