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Is a Debt Consolidation Loan the Best Choice?

Posted by on Friday, June 16th, 2023 in Blogs
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With the rise of interest rates and the economy sitting upon a house of cards, people are worried about how their credit card debt may affect them in the future. Debt consolidation is often a solution to place debt from multiple lines of credit into a single installment loan. However, is this the best solution for consolidating debt?

What Exactly is Debt Consolidation?

Consumers often use a debt consolidation loan to aggregate and take all of their credit cards or revolving credit debt and put it into a single, easy-to-manage loan. This makes it easier to manage as the consumer no longer has to worry about multiple lines of credit and when to pay them off each month. 

This is great for people who may have accrued many small credit cards and filled them up to the limit. Debt consolidation loans buy off all of that debt, and the borrower can then pay off the loan itself at a fixed or variable interest rate. An additional benefit besides having all debt put into a single account is that these loans offer a lower interest rate than a credit card, allowing the borrower to save money over time. 

For example, let’s say Mary has three lines of credit and total debt of $10,000 between all three credit cards. To pay back the $10,000, she has two choices, pay back the money through the credit card companies or consolidate the debt into a single loan. Her average interest rate for her multiple credit cards is 21.40% (the average for new cards as of August 2022). The average interest rate for a debt consolidation loan is dependent on a person’s credit score, so Mary gets a decent rate of 15.4% with an average credit score of 700. Let’s also give Mary five years to pay off the debt.

Pay Credit Card Debt Directly Debt Consolidation Loan
Total Debt: $10,000 $10,000
Interest Rate: 21.40% 15.40%
Monthly Payments: $272.79 $240.00
Total Interest Paid: $6,367.31 $4,400.25
Total Money Paid Back: $16,367.31 $14,400.25


Looking at the breakdown above, Mary can save $1967.06 over five years. 

Choose the best option, Debt Consolidation

Is Debt Consolidation Right for You?

Now, all of this varies from borrower to borrower, and the number one factor is the person’s credit score. A good or bad credit score can determine the interest rate the lender will set for the borrower. If the borrower has a great credit score, then a debt consolidation loan may be the best option; however, a borrower with an abysmal credit score may not receive a good offer for a debt consolidation loan and it may not be beneficial at all.

Depending on the credit card rate and the current loan rate, it may depend. For example, if a borrower has a credit line that is old and has a decent interest rate but now has a bad credit score, the borrower may want to stick to paying the credit card companies back directly. A credit score of 500 has an average interest rate of 25%, which may be higher than a credit card’s interest rate. So it’s important to look at the two rates and compare which one will be better to pay back. 

A Third Option: Balance Transfers

There is also another option for people looking to consolidate their credit card debt. A balance transfer card is usually offered by credit card companies as a kind of promotion. Most of these cards have 0% APR for a set amount of time, usually between 12-24 months, depending on the promotion and company. 

If you believe that you can pay off the debt within the set amount of time or close to it, it might be a good idea to do a balance transfer as no interest will accrue during the promotional period. However, if you delay paying back the full debt, the interest will kick in after the promotion period.

The Key Factor: Credit Score

The borrower’s credit score will determine the decision on whether or not to get a debt consolidation loan. A good credit score will leave the borrower with far more options compared to someone with a poor credit score.

If you believe that you have a low credit score, you should pull your credit report and examine what exactly is giving you a bad score. Contact us at Fix Your Credit Consulting for a FREE consultation. Call (877) 212-2450 for more information. We will be more than happy to answer any questions you may have about your credit history and score.

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