
Debt Consolidation
6 mistakes to avoid when consolidating debt
Jun 30, 2024

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Key takeaways:
Debt consolidation rolls multiple debts into one.
It’s smart to begin by asking questions about loan types and the fees you might pay.
If you continue to use your credit cards after paying them off with a consolidation loan, you could find yourself deeper in debt.
Using debt when the occasion really calls for it often makes sense. But if you’ve ended up with a lot, remember—you can get ahead of your debt problems.
Debt consolidation could help eliminate some of the stress, starting with reducing the number of due dates you track. Set yourself up for success by avoiding these common mistakes.
Debt consolidation, explained
Debt consolidation means you take out a new loan and use the funds to pay off other debts. The idea is to help you manage debt more easily, and often more quickly. You can consolidate many types of debts, like credit cards, personal loans, and medical bills.
Read more: Pros and cons of debt consolidation
1. Signing up for the first debt consolidation loan you find
Sure, you want to consolidate your debt as soon as you can, but take your time and look closely at your options. You don’t want to miss out on the loan with the best interest rate and fees.
Here are several debt consolidation options:
Personal loan: A personal loan for debt consolidation is popular because you can often nab an interest rate that beats your credit card rates, and get the funds quickly. If you get one with a fixed interest rate, you'll know exactly how much you have to pay every month. There are lenders who will work with lower credit scores, or will use alternative ways to approve you for a loan.
Home equity loan: If you’re a homeowner, you could consider a home equity loan for debt consolidation, or a home equity line of credit (HELOC), which lets you borrow, repay, and borrow more as often as you like up to a certain limit. For these loans, you’re borrowing against your home equity (the difference between your home’s value and what you still owe on the mortgage). Interest rates are sometimes lower than for personal loans, and you might be able to borrow more. Since a home equity loan or a HELOC is a mortgage, you could lose your home if you don’t repay the debt.
Balance transfer credit card: You can transfer one or more credit card balances to another credit card account, as long as the total amount is under the credit limit. If you use a credit card that has a lower interest rate than your others, you could save money (but be sure to figure in balance transfer fees). However, watch out for 0% APR offers—as once the promotional period ends, you could end up with a higher rate on your remaining balance.
2. Applying for loans without checking lender requirements
Not every lender works with all types of borrowers. You could spend time applying to a bunch of lenders, only to find out they won’t accept your application.
Check for the lender’s minimum requirements, like a certain credit score or income level. Some may explicitly mention they’ll work with borrowers with lower credit scores. Many offer prequalification—you enter your details and see what loans you qualify for without affecting your credit score.
3. Not factoring in fees
Most loans involve fees. Some charge application fees (a fee to process your application) or origination fees (the lender’s fee for making the loan). If you’re consolidating with a credit card, you’ll probably pay balance transfer fees. These charges add to the overall cost of your debt consolidation loan.
Before signing anything, check how much you would pay in fees, and whether the amount is rolled into your loan or paid upfront.
For example, personal loan origination fees are typically taken out of your loan proceeds. Say you take out a $10,000 debt consolidation loan and the origination fee is 5%. You’ll receive $9,500 after the lender deducts the $500 fee. If you planned to use the full $10,000 to pay off your debts, you have to come up with that additional $500.
Even if the fees are included as part of your monthly payment, be sure you can afford it. Same goes for credit card balance transfer fees.
Read more: How to reduce your total loan cost
4. Continuing to use your credit cards after consolidating debt
Paying off a credit card can feel like taking a huge weight off your shoulders. Temptation may call when you see a large credit limit available again. But using the credit card puts you at risk of getting deeper into debt.
Sometimes you may not feel like you have a choice other than debt, and that’s okay. Consider, though, whether you have other ways to pay for your daily necessities. If it’s possible to use your debit card, cash, or even a prepaid card, you can pay upfront and avoid at least some debt.
5. Only looking at the lowest interest rates
Paying as little as possible in interest saves money. But that’s not the only way you can get more breathing room. You can also go for a longer repayment term. With more time to repay the debt, you lower your monthly payments (but could end up paying more in interest over time). If you find you can afford to make an extra payment occasionally, most lenders let you do that without charge. That way, you pay off your loan faster, and save on interest.
6. Avoiding professional help
It’s possible to conquer your loans by taking out a debt consolidation loan yourself and paying that down. But there may be times when the debt becomes too much to handle, or you find yourself unable to find a solution. That’s when it’s a good idea to talk to a qualified professional. A debt expert could help evaluate your situation and recommend options.
It’s normal to prefer to keep your contact info off sales call lists, but talking to experts is a way to level up your financial game. You’re doing a great thing by educating yourself about the options, and considering each one against the others.

Written by
Sarah is a contributing writer for Achieve. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a writer for other Fortune 500 publications.

Reviewed by
James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.
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