Debt Consolidation – Is it a bad idea?

I’ve been contacted by many readers via email asking personal finance questions. I am always thrilled to hear from ANYONE but I get especially interested in people who are asking for help or guidance. Such was the case with one reader named “Bob,” (the name has been changed) who asked me about debt consolidation. Here is his email.

I am a new fan to your site, I got a link from I have an important question for you. I am a college student, and I’ve found myself in more than 7k in debt. I was living on my own for a few years and got upside down on some payments. I was wondering if I should attempt debt consolidation or if I should try to pay off each debt individually. I’m living at home now till I finish school and would like to get my debt taken care of. Do you have any suggestions?

It’s a heavy burden on me when I’m asked important questions that can have monumental consequences for years to come. I don’t take the answers lightly and I certainly wish to insure that everyone knows that I am NOT a personal financial planner. My insight comes from personal experience and, while it does have value, there are aspects to my experiences that could change the answer if things don’t line up with your situation.

That being said, my answer about debt consolidation is almost always – don’t, but there are some cases where it will work. Most cases though, end up with nothing changed and just one more loan to have to pay back.

Here is my response to “Bob:”

Thanks for contacting me. First, please understand that I’m not a financial planner and that my ideas are from personal experiences.

That being said, I would stay away from debt consolidation in most cases. You really aren’t doing anything to eliminate your debt, you’re just moving it around. You’ll never borrow your way out of debt. Sometimes a debt consolidation loan will give you some monthly “breathing room,” but you will have to be careful not to run up more debt on your newly paid off accounts.

Many times people will be tempted to consolidate debt for a better interest rate and the rate usually IS lower, but in 9 times out of 10, the term is much longer. All you’re really doing is extending the debt’s life!

The best way to get out of debt is with a plan you have personally written on paper. Dave Ramsey calls his plan the “debt snowball.” As you write out what you owe, list the lender, the balance, the interest rate, and the minimum payment. Arrange the list from largest balance to smallest. Pay the minimums on all of them except the one with the lowest balance. On this one, pay the minimum plus anything else you can. You’ll pay it off before you know it. Then, add the payment you were sending to the first lender to the next debt up the ladder. Continue by sending paid off debt 1′s payment plus paid off debt 2′s payment to still active debt #3. The total amount you budget for debt payments will remain the same every month. What changes is who you’re sending it to and the payment amount sent to each individual lender.

People have been successfully using this method for decades and it works. Read this blog entry at No Credit Needed: How To Get Out Of Debt.

Thanks for your kind words and encouragement.

Debt is a symptom. Let me say it again, debt is a symptom. It’s a symptom of discontent, of impatience, of a lack of self discipline, of poor planning, of mistrust, and of living beyond your means.

What happens in far too many cases of debt consolidation is that the problem wasn’t solved by another loan. Having 4 credit cards paid off by one big debt consolidation loan doesn’t address the spending problems, the planning problems, the contentment problems, or the patience problems. Once those old cards are zeroed out, most people start using them again, get right back into the same problem they had before and now, have 4 cards maxed out with a big old debt consolidation loan hanging around their neck. What needs to happen first is a change of heart, and that starts by examining why we went into debt in the first place.

Essentially, when I go into debt for anything, I’m borrowing from my future. I’m taking money out of my future and spending it today. If I’m spending it on items that have lasting value, that increase in value, that isn’t so bad. If I’m borrowing from my future to buy things that will have zero value in less than 5 weeks, that isn’t so good.

We have a 5-5-5 rule at my house when the kids are, let’s say, they’re not in the best mood to get along with each other. I say to them, will this really matter in 5 days, how ’bout 5 weeks, how ’bout 5 months? If the answer is no, then don’t worry about it. I think we can apply the same rules toward buying something that will put us in debt.

Will I be glad I bought this on credit in 5 weeks? How about 5 months? How about 5 years? If the answer is no to any of these questions, should you really be borrowing against YOUR future for a little fun today?

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