VIVA Personal Finance Blog

What is debt consolidation?

Updated: Aug 17

Debt consolidation is when you take out a loan in order to pay off multiple other debts at once. Typically a person will take out a debt consolidation loan and use that money to pay off things like credit card balances and high-interest loans. There are a few nice benefits of debt consolidation:

  • Simplify finances with one monthly payment instead of making multiple payments every month

  • Decrease overall interest rate - particularly if consolidating high-interest credit card debt

  • Lower monthly payments - lower overall interest rate and/or longer repayment plans could result in a lower payment due every month

  • Higher credit score - making regular, on-time payments on a debt consolidation loan and lowering your credit utilization rate can improve overall credit scores

graphic of three money symbols with arrows pointing down to a bag of money

Is debt consolidation a good idea?

That depends!

Debt consolidation loans usually require a hard credit check during the application process, which has an immediate negative effect on credit scores. However, making on-time payments, eventually paying off the debt consolidation loan, and broadening overall credit mix can have a positive, long-term effect.

But (there's always a but!) taking out a debt consolidation loan in order to pay off credit card balances, for example, and then running those credit cards up again is a slippery slope. This pattern can lead to a snowballing effect of needing more/larger loans to pay off previous loans plus new credit card balances, lower credit scores, and higher overall interest rates.

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