4 common debt consolidation mistakes and how to avoid them

If you’ve amassed multiple forms of debt, like credit cards, medical bills or personal loans, you might be considering consolidating.

Debt consolidation is when you combine your debts into one payment, usually with a consolidation loan. Not only does this simplify your debt, but if you qualify for a low enough rate, you can pay less in interest and even get out of debt faster.

Sounds like a no-brainer, right?

Though financial experts agree debt consolidation can be a smart move, it’s not without risk. Avoid these common mistakes:

1: Rushing into debt consolidation

Borrowers with higher credit scores tend to qualify for lower interest rates, including when refinancing. That’s why Charles Ho, a California-based certified financial planner and founder of Legacy Builders Financial, says borrowers should look for ways to build their credit before consolidating.

When working with clients who want to consolidate, Ho pulls their credit report and identifies quick fixes with big payoff, such as scheduling a few payments to lower credit utilization, which is the amount you owe on revolving credit accounts compared with the total available credit of those accounts.

According to Ho, small changes could impact your score in the short term by 50 to 100 points. "It’s literally dollars saved by having a lower interest rate when you consolidate, just by waiting a couple months," he says.

Before applying for a debt consolidation product, pull your credit report and look for ways to quickly build credit.

2: Ignoring root cause of debt

It’s common for people to get trapped in recurring debt if they haven’t tackled the source, says Pete Klipa, senior vice president of creditor relations at the National Foundation for Credit Counseling.

"If someone comes into debt consolidation, and they don’t fundamentally address the budget habits that might have gotten them there in the first place, then they’re just going to fall right back into that trap," he says.

Consolidating can even exacerbate a common root cause of debt: overcharging credit cards. Moving your current debt off those cards frees them up again. If you can’t resist using them excessively, you’ll be in worse trouble.

3: Choosing the wrong loan

Personal loans for debt consolidation are available to borrowers across the credit spectrum, including those with bad credit (629 FICO or lower).

But just because a lender will give you a debt consolidation loan doesn’t mean you should take it.

A smart debt consolidation loan is one with a lower annual percentage rate than the average interest rate of your current debts. You’ll also want to pay close attention to the repayment term. A longer term will mean lower monthly payments, but it also prolongs debt. .

4: Not considering other payoff options

Debt consolidation isn’t the only option available, and depending on factors like your financial situation and credit score, you may be better off choosing another strategy.

Klipa says credit counseling can offer benefits a simple debt consolidation product cannot, since clients receive individualized counseling about their finances, in addition to a plan to restructure and pay off their debt. This is especially valuable for clients who need budgeting advice.

Another option may be to borrow against an asset, like a home-equity loan or a 401(k) loan, Ho says. These loans often have lower APRs compared to an unsecured consolidation loan.

However, Ho urges caution. If you default on the loan, you could lose the asset or face a large tax bill on top of the hit to your credit score.

Regardless of the option you choose, the key is to make a plan and commit to it.

We live in a society that favors instant gratification, but with debt, it’s a slow, methodical process," Ho says.

Jackie Veling writes for NerdWallet. Email: jveling@nerdwallet.com.