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Americans had been doing a better job staying out of debt over the last decade, relative to the personal debt levels seen before the Great Recession. But that scenario is changing.

U.S. adults racked up a total of $1.029 trillion in credit card debt at the end of 2017, according to the Federal Reserve. That amounts to $8,732 per U.S. household, the federal government reports. Worse, way too many credit card customers are paying high-interest rates - often at 20% or higher.

With credit card debt so high, and student loan debt rising to astronomical levels, one way to get on the path to financial recovery is to take out a debt consolidation loan.

These loans can save the day for Americans dealing with high debt burdens, if they manage the consolidated loan process correctly.

On the downside, since debt consolidation is basically a refinanced loan with longer debt-repayment terms, you'll likely be in debt longer than pre-consolidation, unless you can aggressively pay off the loan.

Let's take a look at debt consolidation and see how it can help you get out from under substantial household debt loads, and what risks can emerge if you don't take a diligent approach to manage debt with a consolidated loan.

What Is Debt Consolidation?

With debt consolidation, personal financial consumers can take out one, large loan (i.e., the loan you'll use to consolidate all of your personal debt) and spread the loan out to pay off a wide variety of debts, including credit cards, student loans, auto debt, medical debt and personal loans.

It does so by bundling all of those household debts into one single monthly bill, which theoretically makes it easier to manage, with one payment, and ideally at a relatively low-interest rate. In essence, debt consolidation is all about funneling all your monthly debts into a single loan, and using that loan money to pay them off, leaving only the single consolidated loan left to handle.

Consolidation isn't limited to taking out a loan, although that is a highly common method of dealing with widespread personal debt.

With debt consolidation programs, you're basically looking at two options - balance transfer credit cards or a fixed-rate debt consolidation loan:

  • A low-or-no interest balanced credit card. Here you're moving all of your debts over to a credit card, with the goal of paying off the transferred debt within the card's promotional period.
  • A fixed rate consolidated loan. This type of loan allows you access to a large amount of loan money, which you can immediately use to pay off your household debts.

Pros and Cons of Debt Consolidation

Like any personal financial tool, debt consolidation has its advantages and disadvantage, and it's imperative that a financial consumer understand where consolidation helps and where it doesn't.

These "pros and cons" can help clear up matters:

Debt Consolidation Pros

1. Pay down multiple debts faster

With debt consolidation, you can clean up multiple financial debts quickly and efficiently, thus saving both cash and time in the process. The key money-saving feature usually comes from paying a lower rate of interest on a consolidated loan or zero-interest credit card, compared to the higher interest rates that come with traditional credit cards, personal loans and student loan debt.

Lower interest rates have a ripple effect on high personal debt:

Since you're paying a lower rate of interest, you're steering more money into repaying debt principle. For example, using a consolidated loan with an interest rate of 8% against thousands of dollars in credit card debt with a 16% interest rate saves the borrower substantial money over the long term, if he or she used the consolidated loan to strictly pay off other higher-interest rate debt.

2. You're simplifying the debt repayment process

The term consolidation means gathering multiple things together in one bundle and that's exactly what loan consolidation can do. Instead of having to keep track of six or seven different credit and loan accounts that required on-time monthly payments, you only have one payment to make with a consolidated loan.

It's much easier to manage your debt with a single payment, as opposed to half a dozen payments, leading to fewer missed payments, which saves money on late payment fees and the higher rates that often accompany missed or late monthly debt payments.

3. You'll deliver a positive charge to your credit score

Another benefit of consolidating your debt into a single monthly loan payment is that you're staying well ahead of potential credit problems. With multiple monthly payments, you could easily miss a payment and fall behind. Missed payments, however, have a significant impact on your FICO credit score - 35% of which is calculated on making on-time monthly credit and loan payments.

By making your loan payment on time, you'll be improving your FICO score - not damaging it.

Debt Consolidation Cons

1. You'll still have a monthly debt to pay

While debt consolidation loans may pay down a wide array of smaller monthly debts, you'll have a bigger monthly debt to pay down, and you can't afford to miss the payments. In effect, you're trading a series of smaller payments for one larger, newer form of debt - which needs to be addressed every month, and at a repayment figure that could be daunting at first.

2. If you don't make the consolidated loan, your financial problems will worsen

In theory, bundling your assorted monthly loan debts into easy payment is a good idea. In reality, if you don't make the much larger monthly consolidated loan payment each month and on time, you could incur late fees and higher interest rate triggers that will only deepen your debt problem.

3. Consolidated loans often come with high usage fees

It's common for consumers to be surprised, and not in a good way, at the high fees that can come with consolidated loans from banks and lenders. For example, some loan origination fees, which are tacked on the overall cost of the loan, can clock in as high as 8%. On a $10,000 loan, that could mean adding $800 in extra costs. Make sure to check with your lender to avoid or lessen loan fees.

Five Debt Consolidation Tips for 2019

Use these tips to get the most out of your debt consolidation experience:

1. Do you have good credit? Use a credit card balance transfer

If you have a solid FICO credit score of 700 or above, your best move might be to avoid a consolidated loan from a bank or lender and instead, focus on a credit card balance transfer.

The idea here is to transfer all your monthly debt to a low- or no-interest balance transfer credit card. Be on the lookout for high balance transfer fees, but if you do the job right, you can score a zero-interest rate balance transfer card for up to 24 months. That's a great deal, and one that can save you boatloads of cash, as long as you pay your card bill on time.

2. Think twice about using a home equity loan to consolidate debt

While a low-interest home equity loan is an option when consolidating debt, it comes with risks. Since a home equity loan is attached to your mortgage loan, you're putting possibly the largest personal financial asset you own - your home - at great peril if you don't keep up with the home equity loan payments.

3. Watch out for debt settlement programs

If you opt to hire a debt settlement firm to handle your personal debt problems, do your homework and vet any company you're considering hiring.

By definition, a debt settlement company will negotiate a lower overall payment for your debt, and charge you a big fee - often several thousand dollars paid up front - with no guarantee your debt problem will go away. Better to give debt settlement companies a wide berth and focus on a do-it-yourself debt consolidation campaign using either a loan or balance-transfer credit card.

4. Upgrade your credit score 

The fact is, loan consolidation options only work if you can get them with a good credit score - that's what gets you the low-interest rates needed to save money and pay off loans faster.

Consequently, it's a good idea to address any credit score problems, clean up errors on your credit report, and boost your credit score before you apply for consolidated loans or balance transfer credit cards.

5. Apply financial windfalls to household debt payments

There's no law that says you need to take a workplace bonus or family inheritance and spend it on a new SUV or trip to Italy.

Instead, take that windfall and apply it directly to household debt; it will help you pay off your debt burden faster.