To Consolidate Or Not To Consolidate?

To Consolidate Or Not To Consolidate?

What is debt consolidation?

Debt consolidation is paying off multiple petty debts by acquiring new debt, usually at a lower interest rate and better payment terms.

Why consolidate?

Consolidating your debts into one can give you a clearer picture of your financial status and save money for you too. Most piled up debts are due to interest rates associated with your debts and penalties and surcharges imposed to debts due to missed and late payments commonly due to multiple payments you have to monitor, not to mention that these debts vary in interest rates, terms and timing of payments.

Paying off these interest and finance charges would either decrease your paying capacity or increase your used credit, resulting to decreased credit score. Also these small debts may seem insignificant, but having multiple debts with higher interest rates, since these are most commonly unsecured debts, would still entail a hard hit in your pocket.

A consolidated debt can be easier to manage – you would only be monitoring a single payment with single, possibly lower interest rate, on a certain date.

Consolidation: Pros and Cons

ü  Simplified process of payment of bills û  May incur additional fees and charges
ü  Cost saving; total payments (principal + interest) are reduced û  Could cost more in the long run
ü  Avoid missed or late payments û  Takes longer to be paid in full


What debts may be consolidated?

You can consolidate those debts which may be paid off earlier, most commonly, those unsecured, revolving credits:

  • Credit cards
  • Retail card bills
  • Department store cards
  • Gas card bills
  • Student loans
  • Unsecured personal loans
  • Payday loans
  • Personal lines of credit
  • Finance company loans
  • Medical bills
  • Hospital bills
  • Utility bills
  • Cell Phone bills
  • Home improvement loans
  • Auto repossession
  • Short pay mortgage balances
  • Income taxes

Debts that cannot be consolidated

  • Mortgage
  • Home loans
  • Home equity lines of credit
  • Auto loans
  • Boat loans
  • Recreational vehicle loan
  • Loans from government
  • Lawsuits

Should I consolidate?

You might have been struggling through multiple debts and might have asked the question, “should I consolidate my debts?” The following are the lists of the most common factors you might want to consider before consolidating.

You CAN consolidate if…

Debt consolidation may not be for everyone and may hurt your finances if done under wrong circumstances. The following cases may be allowed to take debt consolidation as alternative in settling debts:

  1. Your debt is less than 50% of your income. The amount you owe is still manageable and you may still settle it through debt consolidation. Otherwise, another loan or credit could make things worse. You might decide to look for other options to pay off your debts.
  2. You have good credit score. Your rating should be good enough to qualify for low interest loans or for 0% introductory rate loans. Your credit score usually serves as basis for banks and credit unions of the risk they are exposed to if they grant you a new loan. Lenders usually conduct hard inquiry to new loan applicants and this will certainly reduce your credit score by few points.
  3. You can afford payments. Liquidity, or the availability of funds, particularly cash, play a vital role. You should have reliable cash to pay off the new loan plus its corresponding interest, promptly and on time. Otherwise, this will only pile up and the consolidation will not achieve its goal to free you up of debt.
  4. You have a plan to curb spending especially if the main source of your multiple due credits is from spending than what you can earn. This usually is the underlying cause of incurring unpaid expenses.

You SHOULD consolidate if…

In the following cases you are obliged, more than encouraged, to consolidate your multiple debts:

  1. You are spending more than you are earning. If you continuously incur debts due to uncontrolled spending, debt consolidation might already be a MUST to your circumstances.
  2. The interest payments on your credit card debt exceed the monthly expenses charged to that card. This means that you have only been earning to pay interest of credit cards. Settling these revolving debts with high interest rates would reduce your expenses for finance charges.
  3. You carry multiple debts on different credit cards.
  4. Your credit card balances are growing. Instead of reducing your debt through your monthly payments, your credit card balances are increasing due to continuous use of credit cards.
  5. You struggle to make minimum payments on your debts. You’re payment of monthly dues burdens your financial capacity and makes you unstable financially. This may lead you to incurring additional debts if you lose funds for other expenses you may incur during the month.
  6. Bills sent to you stress you out. You can barely look at your bills from your lenders since this would entail you will have to pay your monthly dues. This also may be a cause for missed payments since you won’t be reminded on the due date of your current bills.
  7. Your credit score is falling.
  8. You have high debt-to-income ratio and you have been turned down on your debts due to this.
  9. Your total debts is approaching or at credit ceiling limit. This will reflect on your credit utilization rate, or the ratio of your total used credit over total credit available to you (credit limit). Credit utilization ratio is inversely proportional to your credit score or rating, meaning as the utilization rate increases, your credit score decreases and vice versa.


You are already equipped with the technical know-how of consolidating debt, the next questions you might be asking now are: do I really have to consolidate my debts? Am I convinced I should take the big jump of effort to pay off my debts? You may start getting the convenience of consolidating your debts – one-time payment, lower interest rates and path of the ability of clearing all your debts in three to five years’ time. Your decisions today will make the future, so ask yourself, “To consolidate or not to consolidate?”


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