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Let’s start at the beginning. Back in 2018, I set out on a debt-free journey. I threw myself into Dave Ramsey’s baby-steps, “gazelle-intense” as they say. That quickly led to burnout, so the repayment slowed down, but I kept going. But in the beginning, I’d have never dreamed of consolidating any debts. I strongly advised anyone else against it. Because unless you have broken the debt cycle, consolidating is only prolonging the issue. Let’s look at whether you should consolidate your debts.
Should You Consolidate Your Debts?
Here’s the thing; credit can be a useful tool, when you know how to use it properly. The thing with credit is that it needs to be paid back, and often it’s easy to forget. Especially when it comes to credit cards. If you fancy a takeaway but realise you’re short on money, it can be too easy to flex your “trusty” plastic. You have every intention of paying it back, but payday comes around, and you have bills to pay. You need food, and you’re over-stretched, so you pay the minimum payment on your card.
This habit continues for a few months. Maybe you bought groceries with your credit card, because you didn’t want to leave yourself short of cash. But unless you’re paying it off in full, you’ll start paying interest. And pretty soon that interest will add up.
Then it compounds.
You could consolidate your debts to pay it all off, but what happens when you need a little cushioning, or need something that wasn’t budgeted for? Oh, look! Your flexible friend is back to save the day! Now, you’re not only paying your consolidation loan back, you’re also paying a credit card bill again. And so, the cycle continues.
Should you consolidate your debts? Well, that all depends on whether you’ve broken the debt cycle.
If you’re going to just repeat the above, I would tell you in no uncertain terms that it’s a really bad idea. (If things are really bad and you’re struggling to pay bills because of your situation, I’d recommend you speak to a debt charity like National Debtline, or StepChange.)
On the other hand, if you’ve been carefully budgeting for a couple of years, then it’s a possibility. If you have funds to cover most (if not every) spending requirement, and find that you’re trudging along paying more than the minimum payment on your credit card (50% of which is going on interest) it’s time to review your situation.
I’ve been against debt consolidation for a long time, but this time it made complete sense.
Credit interest rates are the Enemy
Doing the credit card shuffle works for a while. (That’s repeatedly moving your balance to a 0% interest balance transfer while you pay it off.) But if you’re only focused on paying the minimum you can afford, eventually the 0% interest period will wear off. It’s what happened to us. Our household income reduced, a global pandemic hit, and things got tight.
While I was paying more than the minimum payment, it was still crushing to see such a huge part of that repayment going on interest payments that didn’t seem to be getting any smaller.
With 4 different monthly payments going out each month (two credit cards, one car finance and one sofa finance), the debt snowball method was having a stand-off with the debt-avalanche method, and neither one came out on top. It became a stale-mate and what felt like a constant chug of paying endless money to companies that make a profit out of unsuspecting people.
Break the Cycle, THEN Consolidate Your Debts
If you want to do this, you 100% need to get a grip on your finances. You need to know how to budget properly, to account for all potential situations. You need to make sure you have an emergency fund to cover you for, well, emergencies (no, it doesn’t include a takeaway). And you need to be confident that you won’t get sucked into using those pesky credit cards again, unless you’ve become TOTALLY financially savvy and WILL pay your balance off in full every month.
Even then, you need to be mindful of overspending (because it’s not free money and will cost you much, much more in the long run).
Once you know you can rely on yourself to be sensible, have a good credit score and meet the eligibility criteria, then yes, you can consolidate your debts.
The key is to make sure your monthly repayments will be lower, and that it’s a low interest rate. Check to see whether you can pay the loan off early and that there are no penalty charges for doing so. Because now that you have one, low monthly payment, you can focus on chipping away at the total. No more worrying about interest and no light at the end of the tunnel. Now you can get serious about getting that debt shifted, once and for all.
And when the debt is gone, you’re one step closer to financial independence.