Does Credit Consolidation Work?

The success of debt consolidation depends on the recipient of the loan. When the right loan is used correctly, debt consolidation may help individuals to pay off their debt faster and for less money. However, for those who aren't in control of their spending, consolidation leads to a further spiraling of debt.

Success

Debt consolidation is successful for those who are committed to paying off debt and keeping it paid off. To use debt consolidation successfully, you must make a conscious effort not to spend on the credit that has been wiped out by the loan. To do so, you need to create a budget that allocates money toward your needs (rent, utilities, food, gasoline), your debt and your savings so that there's no reason for you to use one of your consolidated accounts at any point in time.

Failure

The reason debt consolidation often fails is because people aren't determined to pay off their debt and keep it paid off. For many people, obtaining a consolidation loan is only treating the symptom, not the problem. By sweeping up the debt and putting it in one place, many consumers feel a sense of relief and falsely believe that they have handled the problem. In reality, the root of the problem is overspending, which needs to be addressed with the creation of a budget.

Considerations

While debt consolidation loans are often advertised at low interest rates, not everyone who applies for them actually receives those interest rates. In fact, unless you have excellent credit, it's likely that you will not qualify for the rates advertised by lenders. You may be able to get rates equal or lower to what you could get for a consolidation loan simply by requesting lower rates through your creditors. By doing so, you have less risk of accumulating more debt and you won't have to create a negative impact on your credit score by applying for more credit.

Warnings

Many financial experts advise against consolidation loans. Jenny McCune's Bankrate article cites credit union manager Chris Viale as stating that 70 percent of those who use consolidation loans end up with the same or more debt within two years. To avoid becoming part of that majority, you may benefit from working with a reputable credit counseling organization listed on the National Foundation for Credit Counseling website.