Here's when debt consolidation is worth it (and when it's not)

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Over the last few years, Americans have been racking up the credit card debt — and the issues that come with it. As of the third quarter of 2024, Americans owed a collective $1.14 trillion in credit card debt, the highest total on record. That's an increase of more than $27 billion from the prior quarter and amounts to nearly $8,000 in credit card debt for the average cardholder.

But increasing credit card balances aren't the only issue at play. The average credit card rate is also sitting at a record high of almost 23%, which is driving up the cost of this type of debt. And when you factor in the other economic hurdles we're facing — like inflation and a weakening employment landscape — it's easy to see why an uptick in delinquent credit card payments and maxed-out cards has occurred.

If you're dealing with similar credit card debt issues, you may be considering debt consolidation as a potential solution. Debt consolidation involves combining multiple debts into a single loan in order to secure a lower overall interest rate and simplify the repayment process. But while this approach can provide substantial relief , it may not be the ideal solution for everyone.

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When debt consolidation is worth it

Consolidating your debt may be a strategy worth considering if:

You're carrying multiple high-rate debts

If you're carrying multiple high-interest debts (and credit card balances in particular) debt consolidation can be a beneficial strategy. By consolidating these debts into a single loan with a lower interest rate, you can potentially save significant amounts on interest charges over time and pay off your debt faster.

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You're making multiple debt payments

Managing multiple payment due dates and varying minimum payments can be challenging. Debt consolidation simplifies your financial life by combining these into a single monthly payment, reducing the risk of missed payments and late fees or other penalties.

You have a good to excellent credit score

Lenders will need to approve you for a loan when you're consolidating debt, whether you're enrolling in a debt consolidation program or taking a more traditional debt consolidation route. If you have a credit score of 670 or higher, you're more likely to qualify for debt consolidation loans with favorable terms and lower interest rates, maximizing the benefits.

Your income is stable

Lenders, whether they're a traditional bank or credit union or are working with a debt relief company , typically expect you to have reliable income that will comfortably cover your living expenses and the new consolidated debt payment. This stability ensures you can consistently meet your new payment obligations, so you typically need to show proof of employment or other income sources to be approved .

You can commit to avoiding new debt

When you pay off your credit card debt with a debt consolidation loan, you free up available credit on your cards. That can be a dangerous proposition if you're prone to using your cards for frivolous purchases. If you're committed to avoiding new debt while paying off the consolidated amount, though, this approach could be well worth it.

When debt consolidation isn't worth it

It could make more sense to consider a different debt relief option if:

You have a poor credit score

Many debt relief companies offer debt consolidation programs with more flexible requirements for those who have a few minor credit issues or high debt-to-income (DTI) ratios . If your credit score is below 580, though, you may struggle to qualify for a debt consolidation loan with terms that are actually better than your current debts. In this case, consolidation might not offer significant benefits.

Your total debt burden is low

If your total debt is relatively small (for example, less than $5,000) and you can realistically pay it off within six to 12 months, or if you're already close to paying off your debts, the potential savings from consolidation might not outweigh the fees and effort involved in obtaining a new loan. Some lenders will also have minimum borrowing amounts to contend with, so you could struggle to find a lender if your goal is to borrow just a few thousand dollars.

You struggle with discipline when budgeting

Debt consolidation doesn't address the root causes of overspending. If you haven't addressed the behaviors that led to the debt in the first place, you risk accumulating new credit card debt alongside your consolidation loan.

Your income or job is unstable

If your income is unstable or you're facing potential job loss, taking on a new loan for debt consolidation could put you at risk of defaulting on the new, larger loan. It could also be difficult to get approved for a loan without proof of stable income.

It won't result in significant savings

Calculate the total cost (principal plus interest) of your current debts and compare it to the total cost of the consolidation loan. If consolidation doesn't offer significant savings, it may not be worth pursuing.

The bottom line

Debt consolidation can be a powerful tool for simplifying your debt repayments and potentially saving money on interest. Before you decide on this path, though, you should carefully consider your financial situation and whether this strategy is truly a good fit for your needs. For many, debt consolidation can provide relief and a clear path to becoming debt-free, while for others, alternative debt relief strategies may prove more beneficial in the long run.