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Is It Ok to Consolidate Your Debt Before Paying It Off?

There are two schools of thought on paying off your debt. One (espoused most loudly by Dave Ramsey, I think) says that when you start paying off debt, you shouldn’t move it to lower-interest credit cards or loans. The other, which I believe to be the better choice, says that you should move high-interest debt to a lower-interest place before paying it off.

The Argument for Not Consolidating the Debt

I think the argument for not consolidating your debt makes some sense. Dave Ramsey essentially warns that if people with a debt problem free up a credit card (generally via a balance transfer, since balance transfer credit cards offer low interest, or even no interest), they’ll lose focus and the desire to pay it off. They may even accumulate more debt.

Maybe the debt won’t seem so pressing. Is a loan at 5% interest or 0% as pressing as a loan at 29.9%? Maybe you’ll see the $500 in available credit and use it.

Why Consolidation (of some sort) Is Probably a Better Choice

If you’re serious about paying off your debt, then you’re serious about paying off your debt. Sure, the interest rate will mean that you’re not in as serious financial trouble as before, but the debt itself is still there. A lower interest rate or fewer debts (if you’ve merged them) doesn’t affect your overall balance. It doesn’t affect how you came to be there in your life.

If you’ve racked up a lot of debt, then you’ve (probably) made a number of bad financial choices. It’s time to start making better ones, like paying off the debt and not giving away as much money in interest.

The possiblity of spending more on those now-unused credit cards can be solved by cutting them up or freezing them in a block of ice. Or close them, if it’s that hard for you to control your spending (I only suggest cancelling as a worst-case scenario, as it will affect your credit score).

When is a Lower Interest Rate a Better Choice?

A lower interest rate makes the most difference when your original debt was at a very high rate. For example, if you’ve got credit card debt at 29.9%, getting it down to something even like 7% will make a huge difference in how much you have to repay. This will actually speed up your debt snowball, not slow it down!

There’s no hard and fast rule about when you should look for a better deal vs. when you should leave well enough alone. Take a look at the numbers before you try finding a consolidation loan or balance transfer. Take into account how long you think it’ll take you to pay it off, what difference different interest rates will make over that time, and how much trouble it’ll be to move the money.

A 2% difference in interest rate may not be worth moving for unless you’re going to be paying off the debt for many years. On the other hand, a 10% difference will almost always be worth it.

Be Careful When Transferring or Consolidating Debt

You should still be careful when getting a loan to consolidate your debt or transferring it from one credit card to another. Try calling your creditor first to see if they’re willing to lower the balance themselves, since otherwise you’ll move it elsewhere. Make sure you work with a reputable company. If using a balance transfer card, read the fine print very carefully before signing up. Don’t use your balance transfer card for other purchases or take any more money out on the loan.

How have you handled debt repayment? Was it worth it for you to move any of the loans around to avoid paying more when you paid it off?


{ 2 comments… read them below or add one }

Miranda April 27, 2009 at 9:50 am

Great post on the advantages v. disadvantages of debt consolidation. I like the idea of consolidation if you can keep yourself from using the credit cards again once you have the loan. If you just had to make one payment, at a lower rate, to clear your consumer debt, it would be paid off much faster.

Miranda’s last blog post: Recession Silver Lining: Sales

Diane April 27, 2009 at 12:14 pm

I’m on the side of getting the lowest interest rate possible to stem the bleeding on interest while paying down debt.

IF you’re serious about paying off debt you must stop using the cards while doing so. If you can’t discipline yourself to stop spending on the cards you’re not likely to be successful at paying off the debt!

Freeing up cards should not be a temptation to continue spending, unless you’re not really ready to deal with the problem.

I just advised my best friend to do a balance transfer to a new card with a 3% fee but 0% interest for 1 year. This will save her $100 per month in interest, as the old card had gone up to 27.9%. She is locking up the 27% card. The $100 per month saved on interest will allow her to pay down the debt much sooner when applied to the actual balance.

Part of Dave Ramsey’s strategy is to pay off small balances, in order to see success. That might be necessary for some people to succeed. I viewed my debt as an overall total to be paid down, so I felt success every time I reduced the total.

I did move a couple of debts to lower interest cards while paying down my debt, although I was never able to consolidate it all onto 1 card. I then paid down the highest rate debts first, followed by the lower interest debts until it was gone. It worked for me, saving me $100s in interest over the life of the debt.

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