4 Ways to Tell if Debt Consolidation Will Work for You

Ready to see some $0 balances?

Being in debt is extremely common and also extremely personal. Thankfully, there are plenty of options when it comes to paying off debt. If you owe just one creditor, your debt payoff will be a lot less complicated than someone who owes several. In this instance, there are a few strategies to consider.

Debt payoff options

The debt snowball method will have you focus on your smallest debt amount first, and as you pay off debts in order of size (by sending the largest amount of money to that one, while making minimum payments on the rest), the amount you're paying on your debt grows over time as you roll more money in. Finally, you're making huge payments on your last remaining and largest debt. I went through this myself in 2022, and was kind of amazed at how well it worked for me.

You can also try the debt avalanche method, which also takes a one-at-a-time approach, but going in order of debts with the highest interest rates. This method will save you money, as you'll knock out the more expensive debts first. It can be a little frustrating if you're the kind of person who likes to see early progress, though.

Another option is debt consolidation. This can be achieved via paying off all your debts with a debt consolidation loan or a balance transfer credit card, then paying that off. Doing this will give you just one debt payment every month. If this sounds interesting to you, read on for five ways to tell if consolidating your debts will be a good fit for you.

1. You have decent credit

Debt consolidation via either personal loan or balance transfer card is tied to your credit score, so if your score isn't good, you might not qualify for a low enough interest rate to make it worth your while. The best balance transfer credit cards come with an introductory 0% APR period, lasting as long as 21 months. This gives you nearly two years to pay off your debts transferred to the card before interest is charged. However, they require higher credit scores to qualify.

The same goes for the best personal loans available; if you want a lower interest rate, your credit must be in good shape. There are personal loans for folks with poor or fair credit, but the interest rates will be higher and may not ultimately save you much on interest when paying off your debt. Hence, having a higher credit score will help if you want to pursue debt consolidation.

2. You like simplicity

Debt consolidation is all about simplicity and ease of use. If you go this route, you'll end up with just one payment, and that can be very nice indeed. Having to manage multiple debt payments can be extremely stressful, and if you're not good with scheduling, you might find yourself falling behind on all those payments. And hey, as a bonus, you can even set up your debt consolidation loan or credit card with auto pay, so you don't have to risk forgetting to make that payment every month. So if you want to simplify your debt payoff, debt consolidation could be great for you.

3. You want to avoid accruing more interest

Done right, debt consolidation will save you money on interest. This is especially true if you're paying off credit cards (which have variable interest rates that can be extremely high; in November 2022, the average credit card APR hit 19.04%). If you get a personal loan, you will have to pay interest, but it will likely be less than that if you have decent credit. And if you go with a balance transfer credit card, you'll have that nice, long interest-free period to pay off your balance.

4. You're confident you won't charge your cards up again

Finally, the last way to tell if debt consolidation could work for you is to honestly assess your spending habits. If you move your existing credit card debt to a loan or balance transfer credit card, you will find yourself with $0 balances on those cards. This can be a dangerous temptation for some people, and you definitely don't want to find yourself charging up those cards again, as you'll end up in an even deeper hole. So if you can avoid that temptation and get a better handle on your spending with credit cards going forward, debt consolidation is a solid bet to deal with your debt.

Not all methods of debt payoff will work for everyone, so it's great we have options. If you're thinking about consolidating your debts, consider the above points and make the best decision for you and your finances.