Pros and Cons of Debt Consolidation

Deciding if consolidation is the right solution for your needs.

When you’re having problems with debt, the right solution can help you rein in your payments and save your credit from the damage of bankruptcy. At the same time, there are always certain risks and downsides to any debt solution that you use. So it’s important to understand the upsides and downsides of debt consolidation before sign up for anything to solve your debt problems.

The information below can help you understand the advantages and disadvantages of debt consolidation, in general, as well as the pros and cons of specific consolidation options you can use. If you have questions or need help choosing the right solution for your situation, just call us at to speak with a certified credit counselor. You can also complete an online application for a Free Debt Analysis to request help online.

The pros of debt consolidation

Understand the finanical benefits

Here are the upsides of consolidating debt. The points below apply to any debt consolidation method you choose:

The cons of debt consolidation

Be aware of these financial risks

In most cases if debt consolidation is the right option in your financial situation, then there shouldn’t be too many downsides to using the process in general. Any disadvantages are usually specific to the particular method you use for consolidating – more on that below.

Here are the downsides of debt consolidation, in general:

Comparing the pros and cons of consolidation options

Although all debt consolidation works in largely the same way, there are several different methods you can use that do the same thing. The different methods of debt consolidation have benefits and risks associated with each specific option, so it’s important to understand these so you can decide which way is the right way to consolidate for you.

The following chart can help you understand the upsides and downsides to the different options available for debt consolidation:

Credit card balance transfer Unsecured debt consolidation loan Home equity loan Debt management program
Do-it-yourself? Yes Yes Yes No
Credit score required to qualify Excellent Good Fair Any
Fees High fees for each balance transferred Loan origination / administration fees Loan origination / administration fees Low fees rolled into plan based on budget
Interest rate Based on credit score – can be as low as 0% APR for up to 2 yrs. Based on credit score – must qualify for APR lower than 10% Based on credit score – must qualify for low APR Negotiated by credit counselor – usually between 0%-11%
Collateral required? No No Yes – you put your home at risk of foreclosure because it is put up as collateral No
Accounts frozen during payoff No No No Yes
Credit score impact (if executed correctly) Positive Positive Positive Positive
Financial support No No No Free access to certified credit counseling

In a basic sense, a balance transfer is usually a viable option for anyone with excellent credit score who catches their debt problem early. The biggest downside is the higher fees you usually face for the transfers. Still in the right circumstances, you can qualify for a new credit card that offers 0% APR on balance transfers for up to 24 months. That gives you two years to pay off your debt without any interest added.

When it comes to using a loan to consolidate your debt, an unsecured consolidation loan is almost always the better option if you can qualify for a low interest rate. If you can’t it is usually easier to qualify for a secured version like a home equity loan, but you’re putting a major asset at risk just to reduce your credit card debt. This is why most experts advise against using home equity loans to eliminate credit card debt, because it’s just not worth the risk.

If you’re considering do-it-yourself debt consolidation, but you want to make sure you’re weighing the risks correctly, we offer a special section that walks you through the 3 ways you can assess the pros and cons of consolidating debt on your own. Please read this section carefully before making the decision to consolidate and call us if you have question.

If you can’t use balance transfers and can’t qualify for an unsecured debt consolidation loan at the right interest rate, then the best option is often a debt management program because you protect your assets and still make an effective plan to eliminate your debt. You also get the added bonus of financial education and support from a certified credit counseling service so there’s a lot to gain from a DMP.

The only real downside is that your accounts are frozen while you’re enrolled, so you have to learn to live without your credit cards – but on the other hand, is that really a bad thing considering your credit cards are what got you into this situation in the first place? It’s often useful to use a DMP to break your bad credit use habits, so once you complete the program, you’re not so reliant on credit to get by day to day.

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

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Consolidated Credit is honored to receive the 2012 Excellence in Financial Literacy Education (EIFLE) Nonprofit Organization of the Year award. The EIFLE awards acknowledge innovation, dedication and the commitment of organizations that support financial literacy education worldwide. See what Consolidated Credit can do for you.

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With this amount of debt, you'd pay around $xx.xx on a DMP.

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