When done right, it can save you some money in interest and help you pay off your debt faster. It is important to note that if you are doing it to lower your monthly payments, you could pay for a longer time and pay more in interest. If you are considering consolidating your debt, make sure you set an end goal and put a plan in place to work for you.
There are a few different ways you can go about consolidating your debt. Make sure you look at each option's pros and cons and choose the one that will help you reach your financial goals.
Zero interest, balance transfer credit card
For this option, you need to have a good credit score to qualify. Most of these are introductory offers, and the interest rate will jump up after a set amount of time, such as 12 or 24 months. If you can pay off all, or a significant portion, of the loan in that amount of time, you can save a lot of money, but it can be an expensive option if you can't. Make sure you read the fine print and know the terms of the credit card, and then have a plan on how to pay it off.
Fixed-rate debt consolidation loan
A fixed-rate debt consolidation loan will allow you to pay off all your other debt. This type of loan doesn't require as good of a credit score as the credit card option, but a lower score will impact your interest rate. It only makes sense if the new loan has a lower interest rate than your existing loans.
Home equity loan or 401(K) loan
Debt consolidation may negatively impact your credit score in the short-term, but sticking to a plan without missing payments can help it recover in the long-term.
Debt consolidation is best for people with high-interest debt who are able and ready to focus on paying off their debt. It isn't a magic formula that is going to make all of your debt disappear. Instead, it is a strategy to help you pay off your debt in a structured way. However, without a commitment to changing spending habits, it won't be worth your time and could cost you more in the long run.