What Is Debt Consolidation?
Debt consolidation combines multiple credit card balances into a single payment, ideally with a lower interest rate. Instead of managing 5 cards with different due dates and rates, you make one payment on one account.
Key Takeaway: Debt consolidation works best when you can qualify for a rate lower than your current average. If you're paying 20%+ APR on credit cards, consolidating to a 10-15% personal loan can save thousands.
Debt Consolidation Methods Compared
Personal Loans
- How It Works: Take out a fixed-rate loan to pay off all credit cards
- Typical APR: 6-36% based on credit
- Best For: Larger debt amounts ($5,000+), longer payoff timeline
- Pros: Fixed rate, fixed payment, clear payoff date
- Cons: Requires decent credit for best rates
Balance Transfer Cards
- How It Works: Transfer balances to a card with 0% intro APR
- Typical APR: 0% for 12-21 months, then 15-25%
- Best For: Smaller debt you can pay off during promo period
- Pros: Zero interest if paid off in time
- Cons: 3-5% transfer fee, high rate after promo ends
Home Equity Loans/HELOCs
- How It Works: Borrow against your home's equity
- Typical APR: 7-12%
- Best For: Homeowners with significant equity and large debt
- Pros: Lowest rates, potential tax deduction
- Cons: Your home is collateral—risk of foreclosure
Does Debt Consolidation Save Money? (Example)
Scenario: $20,000 in credit card debt at 22% APR, minimum payments of $500/month
Without consolidation: 63 months to pay off, $11,680 in interest
With 10% personal loan (60 months): $5,496 in interest
Total Savings: $6,184
When Debt Consolidation Doesn't Work
- You can't qualify for a lower rate than you're currently paying
- You continue using credit cards after consolidating
- Fees (origination, balance transfer) eat up potential savings
- You extend the payoff period so much that total interest increases
Pro Tip: Don't Close Credit Cards After Consolidation
Closing old credit cards hurts your credit utilization ratio and average account age. Keep them open with zero balance to improve your credit score.
Wondering if consolidation is right for you? Contact Rrova for a free debt analysis. We'll calculate your potential savings and recommend the best approach for your situation.
