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Is Debt Consolidation Right for Me?

Of late, it seems that several debt consolidation advertisements surface just about every time I log on promising substantial savings if I consolidate all my debt onto a single loan. With the amount of debt in America staggeringly high, it's not surprising that many people may consider this an enticing option to address their debt situation.

According to, Americans owe over $1 trillion in both student loans and credit card debt. On average, each household with a credit card carries $8,400 in credit card debt, and about 37% carry balances on their cards, paying interest charges month to month.

So, is a debt consolidation loan the right option for you?

The potential benefits touted would make it seem so, but understand the drawbacks too:

  • Potential for a lower monthly payment. This can be true but may come at a cost as the loan may have a longer term, which results in you paying more interest fees over the life of the loan.

  • Convenience of having to make one single fixed amount payment per month versus keeping track of multiple bills due over the month with differing amounts due. This can be a nice feature if you currently juggle many credit accounts.

  • Lower interest rates. This may be true, depending on what interest rates you are paying on your current credit obligations and based on your credit scores. The debt consolidator lender will very likely pull your credit report and FICO® Scores when evaluating your loan application. Generally, the more attractive (lower) rates are available to those with higher FICO Scores.

  • A higher credit score. Some debt consolidation providers claim that debt consolidation can improve credit scores. In reality, debt consolidation actions could result in a score increase, decrease or have no impact at all. It's unique for each person and depends on the new information reported along with the person's overall credit report.

    For example, the inquiry and new credit account reported could result in points lost while the reduction of credit card balances may help the score.

If you are considering a debt consolidation loan, you will want to review your credit reports beforehand to check for accuracy and go through the dispute process if you uncover errors. Visit to see how you can get your credit reports for free. Also, accessing your FICO Scores will help you see how you stand and review the score factors that can help you understand where to focus on improving your scores over time.

Understand your objective (lower monthly payment amount, reduced interest rate fees, etc.) for the debt consolidation and then evaluate the loan product's terms very carefully, so you fully understand what you are signing up for. Do the numbers add up? You'll need to "do the math" to determine if consolidating your debt into a debt consolidation loan makes sense. Check out this myFICO calculator, "Should I consolidate my debts?", to help with the cost-benefit analysis.

Lastly, a debt consolidation loan does not alter underlying credit behaviors. Many people have the best of intentions to reduce debt with this kind of loan but end up building up more new debt on top of the consolidated debt. It takes determination and discipline to reduce debt — are you up for the challenge?

Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.