How debt consolidation works (and when it doesn't help)

Debt consolidation means taking out one new loan and using it to pay off several existing debts, often credit cards. Instead of juggling multiple due dates and minimum payments, you make one fixed monthly payment until the new loan is paid off.

When it can help

• The new loan's APR is lower than the average rate on the debts you're paying off.
• You want a fixed end date. Credit card minimum payments can stretch for many years; an installment loan has a set number of payments.
• One payment is easier to manage than several, so you're less likely to miss one.

When it may not help

• The new APR isn't actually lower once fees are included. Compare APRs, not just interest rates.
• A much longer term can lower your monthly payment but increase the total interest you pay.
• The paid-off cards get used again. Consolidation only works if the old balances stay at zero.

Do the math first

List each debt with its balance, APR and monthly payment. Add up what you'd pay in total if you kept paying them as you are, then compare that with the total repayment shown on a consolidation offer. A loan calculator can help you see the monthly payment and total interest for different terms.

A simple plan

• Gather your latest statements so you know exact balances and rates.
• Choose a term you can comfortably afford — shorter terms usually cost less in total.
• When the loan funds, pay off the debts right away and confirm each balance is zero.
• Consider keeping old cards open but unused, or lowering their limits, depending on what works for you.

If you're struggling to keep up with payments at all, a non-profit credit counselling service can review your situation for free or at low cost before you take on a new loan.