Why Consolidation Fails

5 ways your plan to eliminate debt can backfire and how to avoid them.

Being able to consolidate credit card debt can provide you with a way to lower your monthly payments, save money on interest charges and get out of debt faster. However, no single debt solution works in every financial situation and the wrong debt solution used at the wrong time can actually do more harm than good. Credit card debt consolidation is no different. You have to make sure you’re the right candidate for consolidation and then take steps to avoid common pitfalls that can make your situation with debt worse.

The information below is designed to help you understand the top five reasons that consolidating credit card debt can fail and how to avoid each one so you can improve your own chances for success. If you have any questions or would like to request a free, confidential debt and budget analysis from a certified credit counselor, call us at or complete an online application.

Fail Factor No. 1: The interest rate after consolidation is too high

One of the main goals you have when you consolidate credit card debt is to reduce or eliminate the interest rate applied to your debt. When your interest rates are as high as 20% or more on credit like rewards credit cards or store cards, most of each payment you make goes to paying off interest accrued each month, rather than eliminating the actual debt. So you end up paying month after month and never really getting anywhere.

For example:

  • If you have $10,000 of debt on a credit card at 20% APR
  • Your minimum payment would be around $250
  • However, $166,67 of that payment goes to interest accrued that month
  • Only $83.33 of your payment goes to eliminating the actual debt – so only about 1/3 of what you pay each month
  • As a result, it could take up to 403 payments to eliminate the debt in-full and you’d end up paying more interest, in total, that the original debt amount – $19,197 in total.

When you consolidate, you want to reduce your interest rates to below 10%, at minimum. If you can eliminate interest charges entirely, then the full amount of every payment you make can go to eliminating the debt. Still, even at 10% most of your monthly payments go to reducing the principal rather than paying off accrued interest charges.

On the other hand, if you consolidate at an interest rate that’s too high, you end up in a similar situation to what you had before you consolidated – the interest charges eat up your payments and it takes a long time for you to get out of debt, if you can at all.

Fail Factor No. 2: Your plan takes too long, so it ends up costing more

Another reason a credit card debt consolidation plan fails is because it takes too long to complete. As a result, you end up spending more money to get out of debt than you would have if you hadn’t consolidated at all. With a good consolidation plan, you get out of debt faster even though you pay less each month because the interest rate and term on the consolidated debt mean you pay it back in the most efficient way possible.

However, if you extend the term on repayment too far – i.e. the amount of time it takes to pay your debt off – then you can wind up spending more instead of less.

  • Let’s say you have $5,000 in credit card debt at 18% APR.
  • Just making minimum payments, you’d eliminate the debt in 273 payments with total interest charges of $6,923.13
  • But let’s say you get a debt consolidation loan at 10% APR with a really long term – something like 25 years
  • Your monthly payments will be low $45, so it’s really affordable and seems like a good idea up front, but in total the interest charges will be $8,630.51

Of course, extending a debt consolidation loan term like that is rare. In fact, this issue is more commonly seen with federal student loan consolidation if you choose a hardship-based program to get the lowest payments possible. However, depending on your interest rate and the length of your consolidation plan, you need to calculate total interest charges to make sure you’re saving money during payoff instead of paying more. 

Fail Factor No. 3: The monthly payments still don’t work for your budget

Just because you have lower monthly payments, it doesn’t mean they’re automatically going to solve the cash flow problems in your budget. If the payments are not low enough, then you may still be struggling to make ends meet. And that means one emergency or unexpected major repair could send your consolidation plan down the drain if you start missing payments.

For your consolidation plan to work, you have to be able to build a budget around it where every dollar is not accounted for. In other words, you should have at least some free cash flow – income that is not earmarked to cover a specific bill or necessary expense. If you’re spending money as fast as you make it, then lower payments might keep you out of red, but if they’re not low enough to give you some breathing room then you’re likely to face at least a few cash flow challenges before you eliminate all of your debt.

As you’re looking for a consolidation plan, see how much free cash flow you have available in your budget with those consolidated debt payments factored in.  If you’re barely making ends meet, then you may want to consider a different solution that gives you a little more breathing room in case something happens – because inevitably, it always does.

Fail Factor No. 4: You have a significant change in your situation

In Reason No. 3 we talked about emergency expenses and unexpected situations that crop up. These can include things like a car repair, a sick pet, a trip to the ER, or a major home repair. It’s those big expenses that often don’t fit into your budget and often end up generating more debt for you. While these problems can be tough to overcome, it’s still a hurdle you can get past to keep up with your consolidation plan.

However, a more significant change in your situation like a period of unemployment or serious illness that puts you out of work can completely derail your consolidation strategy. Any life change that affects your income can put a credit card debt consolidation plan at risk. If you face one of these major life changes, you may need to change your strategy. If you’re using a debt management program to consolidate your credit card debts and you have a situation like this, call to speak with your credit counselor immediately.

Fail Factor No. 5: You start taking on new debt too early

The goal in consolidation is to eliminate your debt, so taking on new debt is counterproductive. This is an especially high risk if choose a do-it-yourself credit card debt consolidation plan because your credit card accounts remain open after you’ve consolidated. There’s nothing to stop you from going out and charging up those accounts again and maxing out your cards even though you’re still eliminating your consolidated debt.

As a result, you start adding obligations back in and increasing the amount of income you have to use on debt payments in your budget. Rather than reducing your debt, consolidation just gives you a way to eliminate your balances so you can run up new balances. The system is only sustainable for a short time, then you’re back to struggling to make payments again.

Once you consolidate debt, stop charging until you’ve at least eliminated the consolidated debt. On a debt management program, any credit cards included in the program will be frozen, so this helps you stay on track – just make sure not to abuse a credit card if you keep it out of the program for emergencies. With DIY debt consolidation, you won’t have this protection, so you have to be diligent and avoid charging on your own.