Is Credit Consolidation a Bad Idea? Here's What Dave Ramsey Thinks

If you're thinking about credit consolidation, you may want to read Dave Ramsey's advice.

Finance expert Dave Ramsey urges people to get serious about debt payoff, and to focus on paying off their debt as fast as possible. But there's one debt payoff tool that he thinks may not be wise to use: credit consolidation. 

As Ramsey explained, "Credit consolidation is the process of taking multiple credit card payments (with sky-high interest rates) and rolling them into one single payment. The goal with consolidation is to exchange all those payments and high interest rates for a loan with one payment and a low interest rate."

Exchanging expensive debt for cheaper debt can seem like a good idea, and even Ramsey admits that it "sounds nice." But, despite the fact that credit consolidation could seem on the surface like a good approach to becoming debt-free, Ramsey is not a proponent of it.

Here's what Dave Ramsey has to say about credit consolidation

Ramsey has a few key objections to consolidation. 

First and foremost, he says you may not always get a better rate when you consolidate debt -- and sometimes your new loan may charge even higher interest than your existing debt. In this situation, he correctly points out that there would be no benefit to using this approach. 

But even if you can get a better rate, he still doesn't believe credit consolidation is a good approach to take. That's because, "You can’t borrow your way out of debt." 

Ramsey said if you consolidate your debt, you are not solving the real problem, which, in his opinion, is that you aren't sending enough extra money to your creditors and you don't have control over your spending. 

A lower interest rate is not going to solve these things, he explained, so you shouldn't pursue credit consolidation as a solution. 

Is Ramsey right?

As mentioned above, Ramsey is correct that you would not want to consider credit consolidation if you had to do so at a higher interest rate. In most cases, you also wouldn't want to go through this process if you would end up paying the same rate as on your current debt -- especially if your new loan would make your payoff time longer since the extra time spent paying interest would make repayment costlier.

However, he's wrong about whether credit consolidation can be helpful. Despite what he says, sometimes the high interest rate really is the problem when it comes to debt payoff. You may have reformed your spending habits and be sending every single dollar you can to your creditors, but if your interest rate is 27%, it is still going to be a whole lot harder to become debt-free than if your interest rate is 7%. 

So, while you shouldn't assume that simply consolidating your debt is going to help you get out of it, you should absolutely consider taking this step to reduce your interest rate if you're serious about debt payoff and are committed not to getting back in the hole again. 

If you can make your financing charges cheaper, all those extra dollars you are working so hard to send to your creditors won't just be eaten up by interest but they will actually help the principal balance go down faster. 

There's no reason you wouldn't want that -- and every reason to move forward with making debt payoff easier on yourself so you can become debt-free sooner and with a lot less stress.