10 Common Debt Consolidation Mistakes to Avoid

Quick Answer

Consolidating debt can improve your financial situation, but it can also hurt you if you aren’t careful. Learn how you can avoid common debt consolidation mistakes, including:

  • Not working on your credit first
  • Not considering all your options
  • Not checking for fees
  • Missing a payment
  • Not getting to the source of your debt
A couple looking at their bills, realizing the mistakes they've made in handling their debt.

When you're deep in debt and juggling multiple payments each month, consolidating those debts into just one loan can be a source of relief. Debt consolidation loans can also be a useful tool for getting out of debt more efficiently and with less money paid in interest.

But as with any form of debt, mismanaging debt consolidation loans can lead to negative impacts on your finances and credit. To make sure debt consolidation is a win, not a burden, avoid these 10 debt consolidation mistakes.

1. Not Working on Your Credit First

Your credit has a big impact on the interest rates lenders charge you, so taking steps to improve your credit before you apply can mean saving hundreds of dollars over the life of your loan. Here are some boxes to tick before you shop for debt consolidation loans:

  • Check your credit report. Request a free copy of your credit report through Experian for a glimpse of what lenders see, including your payment history, balances, mix of accounts and inquiries on your report.
  • Look for errors. You have the right to dispute information on your report that you don't recognize or believe is potentially fraudulent.
  • Look at your credit utilization rate. If you're using more than 30% of your available credit on your credit cards, try to pay down your balances some before you apply.
  • Try Experian Boost®ø. Experian Boost can help you raise your credit score instantly for free. You'll receive credit for the bills you already pay, such as streaming, utilities and rent.
  • Wait a few months. Building up your history by making on-time payments for a few more months can lead to gradual increases in your credit score. If you think you can wait to pursue debt consolidation, doing so could help you get better terms.

2. Not Considering All Your Options

A debt consolidation loan is just one strategy for paying off debt. Also consider these other methods:

  • Create a payoff plan. Use the debt snowball strategy or the debt avalanche strategy to decide which debts to prioritize paying off first. This can help you stay motivated and save money in interest.
  • See a credit counselor. If you're struggling with managing debt, budgeting, saving and other finance moves, working with a nonprofit credit counselor can help you chart a course forward.
  • Consider a balance transfer card. If you have good credit, a balance transfer card can be a great tool for saving money on interest and paying off your debt. Balance transfer cards charge fees for transfers, however, and you may not get a credit limit high enough to cover all your debt.

3. Going Deeper Into Debt

A debt consolidation loan can help you wrangle your debts into just one loan, which is a relief from the immediate burden of many balances and payments due. But this sense of relief can also make your situation worse if seeing your credit card balances reduced to zero encourages you to spend more. Avoid racking up any credit card balances after you consolidate. Otherwise, you'll end up buried in more debt.

4. Taking on a Higher Interest Rate

Folding your debts into a debt consolidation loan won't save you money if the new loan charges more in interest. For a consolidation loan to be in your financial favor, its rate should be less than the average interest rate on the card balances you want to consolidate. That tells you what your debt is costing you as a whole. To truly get a sense of what you're paying, you'll want to take the weighted average of your debts.

For example, say you have a credit card balance of $5,000 with an annual percentage rate (APR) of 20% and a loan balance of $10,000 with an APR of 11%. To find the weighted average, you'll need to multiply each balance by its interest rate and then divide by the total dollar value of all your debts. In this example, that looks like this:

  1. Determine your APR charges: Multiply your APR by the total balances. (0.20 × $5,000 and 0.11 × $10,000). Your totals are $1,000 and $1,100.
  2. Add your APR charges: $1,000 + $1,100 = $2,100
  3. Add your total balances: $5,000 + $10,000 = $15,000
  4. Divide your APR charges by your total balances: $2,100 / $15,000 = 0.14

Expressing 0.14 as a percentage, you get a weighted interest rate average of 14%. You should look for a debt consolidation loan with a rate lower than that to save money.

5. Taking the Longest Term Available

While opting for the longest repayment term available can lower your monthly payments, you'll also pay more in interest over the life of the loan. That makes your debt more expensive. Aim for a shorter term length if possible. Just make sure you're considering how much you can realistically afford as a minimum payment each month to avoid overextending your budget.

6. Not Checking for Fees

There are two fees to watch out for when you apply for a debt consolidation loan: origination fees and prepayment penalties.

An origination fee is an upfront charge lenders assess for simply processing your loan. If possible, avoid origination fees by shopping around for a loan that doesn't charge them.

You should also look for a loan without prepayment penalties. It's always ideal to pay off an interest-bearing debt as quickly as possible, so you don't want to be charged for making aggressive payments and being rid of your loan early.

7. Missing a Payment

As with any type of debt, missing a payment by 30 days or more comes with serious consequences. Paying late not only has a serious negative impact on your credit score, but it also can trigger lender fees.

Set up autopay for at least the minimum due to avoid this mishap. Not only will you never forget to pay on time, but your lender might even offer a slight discount in interest for simply opting for automatic payments.

8. Only Paying the Minimum

While paying just the minimum will keep your credit intact, it's also the most expensive way to manage your debt repayment. You're far better off paying more than the minimum if you can. Just make sure to factor in any prepayment penalties your lender charges.

To find extra funds to direct toward paying off your debt sooner, consider taking on a side hustle and funneling the cash toward repayment. You can also direct any windfalls, such as your tax refund, to paying off the debt. Or, try a no-spend challenge or other savings challenges and make additional payments with however much you save.

If your lender allows it, you can also schedule automatic payments every two weeks, rather than once a month. Try to make these payments a little larger than just enough to cover the payment due.

9. Mistaking Settlement for Consolidation

You might come across debt settlement companies that claim you can turn your multiple high payments into just one payment, made directly to the company, and reduce the amount you owe your lenders. While that may sound tempting, you're better off avoiding settlement.

When you work with a debt settlement company, they typically encourage you to cease all payments to your lenders. This results in missed payments and delinquencies on your credit report, which does lasting damage. If you do settle for less than the total amount you owe, that will also be noted on your credit report and could be a red flag to future lenders.

In addition, debt settlers can't guarantee that they'll be able to negotiate all your debts down, which means there's no promise of success. Don't mistake these sometimes sketchy programs for consolidation.

10. Not Getting to the Source of Your Debt

What a debt consolidation loan is: a tool for lowering your monthly payments and paying less in interest. What it isn't: a magic eraser. Make sure you're getting to the root of how you ended up in debt. If overspending led you into a debt spiral, institute a new plan for living within your means, sticking with a budget and building financial stability.

The Bottom Line

When a debt consolidation loan is the right choice, your best bet is to shop around for the most beneficial rates and terms before you apply. An efficient way is to view debt consolidation loans matched to your credit profile through Experian CreditMatch™. You'll see loans from partners tailored to your goals, and you'll be able to view and compare rates and terms in one simple hub.