Before You Consolidate

1. Start with what you actually owe, at what rate

Almost nobody knows this number. Balances sit across two or three cards, a store account, maybe a car loan, and the total is something you avoid adding up. Add it up anyway. Write down every debt, its balance, its APR, and what you pay against it each month.

The rate is the part people skip, and it is the part that decides everything. A 6,000 balance at 26% and a 6,000 balance at 9% are not the same debt. Consolidation is only ever worth doing if it moves money from a higher rate to a lower one by enough to cover its own costs.

Once it is written down, one thing usually becomes obvious: the problem is concentrated. Often a single high-rate balance is generating most of the interest, and attacking that one directly is simpler, cheaper and faster than restructuring everything.

2. The number that decides it is not the monthly payment

This is the single most expensive mistake in the whole subject, and it is not an accident that lenders lead with the monthly figure. A lower payment feels like relief. It is not the same as paying less.

Take 12,000 of card debt at around 23%, with 400 a month going at it. Carry on as you are and it clears in roughly four years. Now take a consolidation loan at 15% over seven years: the payment drops to about 250 a month, which feels like winning back 150 every month — and you will pay thousands more in total, because you are paying interest for three extra years.

The rate went down and the cost went up. Both things are true at once, and only one of them appears on the offer.

So the comparison that matters is not this loan against paying the minimum. Every loan beats paying the minimum; that is why it is the comparison you are shown. The real question is whether this loan beats carrying on with what you already pay.

• Ask for the total of payments, not the monthly payment.
• Compare it against continuing at your current payment, not against the minimum.
• If the term is longer than the time you would otherwise take, expect it to cost more.

3. What an origination fee really costs

Most consolidation loans charge an origination fee, usually 1% to 8%, and it is normally deducted from the money you receive rather than billed to you. That detail matters more than it sounds.

If you owe 12,000 and the fee is 5%, borrowing 12,000 leaves you with 11,400 — not enough to clear the debt. To actually clear it you have to borrow about 12,632, and you then pay interest on that larger figure for the whole term. The fee is not a one-off 600; it is 600 plus every dollar of interest that 600 attracts over five or seven years.

A loan advertised at a lower rate than your cards can still lose once the fee is counted. Always ask what the APR is including the fee — lenders are required to tell you.

4. Never turn unsecured debt into secured debt to lower a payment

Credit card debt is unsecured. If everything goes wrong, it is unpleasant — collections, a damaged credit file, possibly a lawsuit — but nobody can take your house for it.

A home equity loan, a HELOC or a cash-out refinance is secured on your home. Moving card balances into one of those converts a debt that cannot cost you your house into one that can. The rate is lower, sometimes dramatically, and that is exactly what makes the offer persuasive.

Sometimes it is still the right call, with stable income and a genuine plan. Far more often it is a way of making an unaffordable situation feel affordable for a year, after which the cards are full again and the house is now on the line as well. If you are considering it, speak to a non-profit counsellor first — not to the lender offering it.

5. Balance transfer cards: the maths and the trap

A 0% balance transfer can be the cheapest consolidation available. It can also be the most expensive, and which one it turns out to be is decided by whether you clear it inside the promotional window.

The transfer fee is typically 3% to 5% up front. On 10,000 that is 300 to 500 — still far less than a year of card interest, so the arithmetic usually works. What matters is the end of the promotion: whatever is left then reverts to the standard rate, often north of 25%.

Divide the balance by the number of promotional months. If you cannot comfortably pay that figure every month, the transfer is not a plan, it is a delay with a fee attached.

• Work out balance ÷ promotional months before applying. That is the real payment.
• Check the fee, and whether the 0% covers purchases as well as the transfer. Usually it does not.
• Set the final payment date in a calendar the day you open it.

6. What consolidation does to your credit

Expect a small dip first. The application is a hard inquiry, and a new account lowers the average age of your credit history. Both effects are minor and both fade.

After that it usually helps, for a specific reason: paying cards down to zero drops your credit utilisation, which is one of the heaviest factors in a score. An instalment loan does not carry a utilisation figure the way a revolving card does.

The danger is what happens next. Cleared cards are open cards, and running them back up while the consolidation loan is still outstanding leaves you with both — the original balances and the loan that was supposed to replace them. This is the most common way consolidation ends badly, and it has nothing to do with the maths.

7. When consolidation is not the answer

Consolidation restructures debt you can afford to repay. It does nothing for debt you cannot, and taking a loan to postpone that conclusion generally makes it worse.

If your minimum payments alone exceed what you can pay, a lower rate does not fix that. If you are already behind, most consolidation lenders will decline you anyway, and the ones who approve you will charge a rate that defeats the purpose.

The alternatives are worth knowing before someone sells you one. A debt management plan through a non-profit agency negotiates lower rates and consolidates payments without a new loan. Settlement — paying less than the full balance — damages your credit for years and can leave you with a tax bill on the forgiven amount. Bankruptcy is a legal process with long consequences and, occasionally, the right one. Each is a different tool, and none of them is a consolidation loan.

8. The free help almost nobody uses

Non-profit credit counselling agencies accredited by the National Foundation for Credit Counseling will review your whole situation, usually at no charge, and tell you plainly whether consolidating helps. They have no loan to sell you, which is the entire point.

The Consumer Financial Protection Bureau publishes free guidance at consumerfinance.gov, and the Federal Trade Commission covers debt relief scams at consumer.ftc.gov. Both are worth an hour before you commit to anything.

One rule that will save you from most of the bad actors in this industry: a legitimate organisation does not charge you a fee before doing anything, does not guarantee a result, and does not pressure you to decide today.

9. Nine questions to ask before you sign

Ask all of them, in writing, and keep the answers. A lender who will not answer plainly has told you something useful.

• What is the APR including the origination fee?
• What is the total of all payments over the full term?
• What is the origination fee in dollars, and is it deducted from the advance?
• Is there a prepayment penalty if I clear it early?
• Is this loan secured on any of my property?
• Is the rate fixed for the whole term, or can it change?
• What happens if I miss a payment — fees, rate increase, default terms?
• Will you pay my creditors directly, or send the money to me?
• What is the late fee, and when exactly is a payment considered late?