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Pros and Cons of Debt Consolidation

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Some of us juggle multiple debt payments each month. But instead of keeping tabs on all these balances, interest rates and due dates, it’s possible to combine multiple debts into one. This strategy is called debt consolidation. 

Debt consolidation can come with a few possible benefits: For one, you could get more favorable terms (read: a lower interest rate) than what you’re currently paying on your credit cards and other debts.

Some borrowers may also score a lower monthly payment and/or get debt-free sooner. There’s also the benefit of simplifying your personal finances.

Instead of having to think about several payments and due dates, you could have just one recurring monthly payment. Two common ways of consolidating your debt are with a balance transfer credit card or a debt consolidation loan. (We’ll go over how each of these works later.)

That being said, debt consolidation is not always right for everyone. So before you jump into it, consider these pros and cons.


Multiple bills also tend to come with multiple due dates.


Pros of debt consolidation

Deal with just one monthly payment

Sometimes it’s hard to stay on top of payments. You could have everything from rent to phone bills that you have to pay each month.

And let’s not forget credit cards – the average American had 3.84 credit cards in Q3 of 2020, according to Experian.

Multiple bills also tend to come with multiple due dates, which can be a lot to keep up with. Debt consolidation can help simplify this whole process. 

By taking all your debts – including credit card balances, medical expenses and bills – and lumping them into a single debt, you may only have to make a single monthly payment (be sure to check with your specific lender about any exclusions).

We’ll discuss how to do this in the next section! 

Save on interest

One common way of consolidating debt is with a personal loan. To do this, you’d apply for a personal loan and use the borrowed money to knock out your existing debts.

Then you’d pay off your debt consolidation loan in monthly installments over a set term.

Personal loans, like debt consolidation loans, are typically unsecured loans, meaning you don’t have to put up any personal items as collateral to qualify for one.


By moving your existing credit card balances to a balance transfer credit card, you gain a buffer period to pay your debt.


Personal loans can be helpful for debt consolidation because their rates may be lower than those on your credit cards or other debt if you have good credit.

And if your rates with a debt consolidation loan are lower, you could be saving on interest in the long term.

Another way to consolidate debt is by transferring your higher interest rate credit card debts to a new credit card with low or no interest. This is called a balance transfer.

By moving your existing credit card balances to a balance transfer credit card, you gain a buffer period to pay down your debt without having to pay interest – or very little interest.

That could mean a lower monthly payment (depending on how much interest you were being charged previously).

The key is, you’ll want to pay down the transferred debt before that promotional period ends.

If you want more information on these two debt consolidation strategies, check out our article on balance transfer credit cards versus personal loans.

Get a fixed interest rate

If you have debt with variable interest rates, switching to a debt consolidation option with a fixed rate could get you more predictable monthly payments.

With both a personal loan and balance transfer credit card, your rate may be fixed, so you’ll always know exactly how much you owe each month.

Just know that with a balance transfer credit card, once that promotional period ends, your interest rate will go up dramatically and likely become variable again.

Having a fixed rate on your debt could also be an attractive option if interest rates are on the rise.

Variable rates change depending on the market. Many credit card interest rates are based off the U.S. prime rate, the commonly used short-term interest rate charged by banks.

Credit card APRs are usually the prime rate plus an additional added-on percentage – known as the spread – which is different for everyone.

So if the prime rate is 4.75 percent and your APR is 14.75 percent, the bank is charging U.S. prime plus 10 percent.


With a personal loan or a balance transfer credit card your rates could be fixed.


Big picture, any rise in market interest rates could result in you paying more on your debt over time.

With a personal loan or a balance transfer credit card (during the promotional period) your rates could be fixed – meaning your rate won't change for the life of the loan and you could end up with a lower monthly payment.

Improve your credit score

In some cases, consolidating debt could improve your credit score. Let’s talk about how that could work.

Your credit utilization ratio is one of the major factors in determining your credit score.

If you’re close to the credit limit on all or most of your credit cards, then your credit utilization ratio is high.

And if you have a high utilization ratio – in both your overall credit usage and the usage of each card individually – it could damage your credit score.

But by paying off your debt with a new loan or balance transfer credit card, you’ll be knocking down your balances and therefore, lowering your credit utilization ratio, too.

Good to know: It may be tempting to close credit card accounts after paying them off. Just keep in mind that this could also affect your credit utilization ratio because it would be lowering the amount of credit you have.


Any time you apply for a loan, lenders make a hard inquiry on your credit.


Cons of debt consolidation

Depending on your individual situation, consolidating debt could come with a few possible downsides.

Credit score check

Like we just mentioned, in some cases debt consolidation could boost your score. But for some people, consolidating could also cause your score to dip.

Here’s one reason why: Any time you apply for a loan, lenders make a hard inquiry on your credit. Too many inquiries could lower your credit score.

To avoid this, do some research on your loan options first, and try to find one with the best terms before you apply. (Some lenders do what’s called a “soft check” for pre-qualification which won’t affect your score.)

Potential fees

In addition to paying interest, personal loans may come with other costs such as an origination fee.

When you’re shopping around for a debt consolidation loan, all other things being equal, be on the lookout for one that has few, if any, fees.


If you currently struggle with carrying lots of debt, consolidating it could be part of a larger money management strategy.


Taking on new debt

One thing that shouldn’t be overlooked is that a personal loan is still a form of debt – only now your existing debts are in a single spot.

If you currently struggle with carrying lots of debt, consolidating it could be part of a larger money management strategy that includes not only paying off balances but also making some changes to your budget or spending habits.

So remember: Debt consolidation alone won’t change your debt habits if you haven’t addressed the reasons why you accumulated debt in the first place.

Is debt consolidation right for you?

As we’ve outlined, debt consolidation isn’t for everyone. If you’re someone with a lot of outstanding and overwhelming higher-interest debts, debt consolidation could be right for you.

If you’re someone who really only has a few debts here and there, it could just take a well-crafted budget and strategy to tackle your bills. (And if that’s the case, we have a few pointers about how to get out of debt.)

If you decide debt consolidation makes sense for you, that’s great! And even if not, trying to figure out your options for getting on top of your debt is still worth it. No one has to stay in debt, and getting out of it can feel really good.

This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

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