On average, Americans have almost 4 credit cards per person. The average American household carries over $7,000 in credit card debt alone. It can often seem overwhelming to keep track of due dates, minimum payments, varying high interest rates, and a lot of other information. What’s more, it’s easy to miss due dates and fall behind on credit card payments.

If you are juggling multiple credit cards, accounts, and other unsecured debts, you could consider consolidating debts with a debt consolidation loan to roll all your existing debts into just one loan. It makes life easier as you make just one payment per month from your account, and you may even benefit from lower interest rates, especially compared to credit cards.

As with all debt relief solutions, debt consolidation comes with pros and cons, so here are some tips along with a detailed report on the principles, benefits, and drawbacks of how debt consolidation may help you and the services it can offer.

Understanding Debt Consolidation

Many Americans face multiple debts: credit cards, bank and personal loans, and even unpaid bills are unsecured debts that must be paid. These come with different interest rates and payment schedules, making them difficult to monitor. This directly affects your bottom line, preventing you from keeping on budget and forcing you to pay late fees.

Debt consolidation can be the right debt relief solution for many. It combines multiple debts into a single loan, often with the goal of securing better terms or simplifying the repayment process. You apply for a debt consolidation loan and use it to repay all your current debts. If it gets approved, you then have to repay the consolidation loan amount with one monthly payment until you have repaid it in full.

How Debt Consolidation Works

Debt consolidation is based on the concept of taking out a new loan to pay off debt that already exists.

This is possible whether your debt is the result of personal loans, business loans, balance transfer credit cards, or home equity loans. The new loan ideally offers better interest conditions than the original debts, letting you lower your monthly payments and manage them more easily.

A personal loan may carry a lower interest rate, especially compared to credit cards. If you repay your credit card debt with a personal loan, you may benefit from lower interest charges over the lifetime of the loan. This can result in significant annual savings.

Balance transfer credit cards often give you an introductory 0% interest for the first 6 to 12 months. You can transfer the balance from existing credit cards to the new one and repay the debt within the 0% period. It’s a way to refinance your debt on more favorable terms.

The Pros of Consolidating Your Debt

Interest rate savings

One of the main benefits of consolidating debt is the potential for significant interest savings that will save you money. The new debt can help you save on your interest which in the long run can help.

If you have an excellent credit score, it’s great news as you can get a consolidation loan with a lower interest rate. This will reduce the total amount you will pay over the life of the debt. Credit cards have the highest interest rates; if you can obtain a consolidation loan with a lower interest rate than your credit cards, you will be saving on interest charges.

Improve credit score

Another important benefit is the potential to improve your credit score.

When you consolidate debt and make regular, on-time payments on your new loan, you can establish a positive payment history that doesn’t hurt your credit. This will reflect on your credit history, give you a good credit score, and create a virtuous circle whereby you benefit from the best credit terms when banking, if you want to buy a new car, or when you are applying for a mortgage.

One monthly payment

Debt consolidation loans give you a clear strategy for making sure you don’t have any missed payments. You only have one monthly payment to make so it’s easy to remember and include it in your monthly expenses.

Repay your debts faster

With a lower interest rate, you can repay your debt faster. You can use the funds that you save on interest to pay more of your debt and be debt-free in a shorter time frame. This will keep the end of your debt close.

The Cons of Consolidating Your Debt

Despite its benefits, even the best debt consolidation isn't without risks. You should learn the cons and always be checking every debt relief option available to you before making a decision.

It doesn’t fix the underlying problem

The main concern with a debt consolidation loan is that it doesn't address the underlying financial planning behaviors that may have led to the debt in the first place. Without changes to spending habits, borrowers may move into new debt while paying off the consolidated loan.

If your income is not enough, your expenses are too high, you buy expensive products, etc., your financial problems may soon return unless you address their root cause.

The interest rate might not be so low

If your credit score is below average, you won’t be able to obtain a good interest rate on your consolidation loan. This means that you will be paying a lot in interest charges. The same applies to anyone applying for a 0% APR credit card, which may be unavailable to you if you have bad credit.

Upfront fees

Some consolidation options may come with origination fees or other tax costs that you need to check carefully and consider in the overall financial equation. The credit card company can charge balance transfer fees, which partly offsets the benefits of 0% APR.

When Debt Consolidation Makes Sense

Debt consolidation is a good option and a sure way for people who have a stable income and a clear plan for debt repayment.

It works best when you have access to an interest rate significantly lower than your current rates and when you're trying to avoid new debt while paying off the consolidated loan.

It holds particular rewards for those juggling higher-interest debts who want to streamline their debt payments, as it may potentially help you save money on interest and help you with your monthly account management. If you can get approved, the consolidation loan can be a way out of the debt burden and help your personal finances.