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Drowning in debt?  Consolidation could help, if the terms are right

Consolidating debts can be useful if you achieve a lower interest rate, but it's not a magic fix, an LI expert says. Getting out of debt still requires changing your money habits.

Debt consolidation is a solution for some, but

Debt consolidation is a solution for some, but experts say to check the terms carefully to make sure they are favorable. Photo Credit: Getty Images/courtneyk

Habits are hard to break. Americans tamed their use of credit cards post-recession, but they’ve fallen off the wagon. According to a Lending Tree analysis of new Federal Reserve data, Americans are set to amass $4 trillion in consumer debt — which includes non-mortgage debts such as personal loans, auto loans and student loans in addition to credit card balances — by year-end.  Collectively, they owe more than 26 percent of their income on consumer debt, up from 22 percent eight years ago.

Many people deep in debt are searching for solutions. Is debt consolidation a good option?

With consolidation you combine multiple debts, and ideally reduce the number of creditors you owe and lower your monthly payments.

The pros: "It’s the best way to get out of debt besides bankruptcy,” says Milad Hassibi, director of content at financial website CrediReady.com.

Debt consolidation can be helpful if you have one or more accounts with high interest rates, and a lower rate will help you pay off the debt, points out Joe Toms, president of FreedomPlus, a lender in San Mateo, California.

The cons: “Consolidating your debts isn’t a magic fix. You’ll still have debt. It’s just the first step. You have to change your behavior, whether that means spending less or saving more. The best way out of debt is good money habits,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.

You’re not guaranteed a lower interest rate. Says Zimmelman, “Consolidating isn’t attractive if you’ll end up paying more in interest. Also check if the rate is fixed or just an introductory rate that will increase after a period of time.”

Consolidation might not be worth it if your debt load is small enough to pay off within a year or less.

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