Debt Consolidation: Does it Pay Off?

Managing debt payment while also looking for the best rates and time frame can be tough. In some circumstances, debt consolidation may be a helpful tool. In today’s episode, we will explore debt consolidation and its associated details. Sara Rathner, NerdWallet Travel and Credit Cards Expert joins Cassidy Clement to discuss.

Summary – Cents of Security Podcasts Ep. 96

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Sense of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers, and today I’m your host for the podcast. 
Our guest is Sara Rathner, credit card expert at NerdWallet. Managing debt payment while also looking for the best rates and timeframe can be tough. In some circumstances, debt consolidation may be a helpful tool. In today’s episode, we’ll explore debt consolidation and its associated details. Welcome to the program, Sara. 

Sara Rathner 

Thank you for having me. 

Cassidy Clement 

Yeah, sure. So, since it’s your first episode, why don’t you tell the listeners a little bit about your background in the industry? 

Sara Rathner 

Sure. I have been writing for NerdWallet since 2018, and since that time, I’ve been covering things like credit cards, debt consolidation, and even things like travel rewards and other related topics. 

Cassidy Clement 

Great. So then you’re the perfect person for this topic. When we get into debt consolidation, that’s something that I guess a lot of people are starting to look at these days with a volatile market and a little bit of uncertainty about how things are going with rates and such. So, what exactly is debt consolidation and how is that combination or consolidation done? 

Sara Rathner 

Essentially, it’s when you have multiple debts that you’re currently making payments on, and you take out a new loan, use that loan to pay off your debts, and then you begin making payments just on that new loan. So essentially, it’s combining all of your debts into one monthly payment, one interest rate, one length of time—and it could be a lot easier to manage than having lots of debts at multiple interest rates that you’re making payments on throughout the month. 

Cassidy Clement 

Yeah. So in my research, I had found out about a few different topics—or debt types, let’s say—that are covered by debt consolidation as an action. There might be medical bills or student loans or auto loans. I know your area of expertise is credit cards, but what types or common examples would you be able to give to our listeners of the items or types that would be consolidated for this type of action? 

Sara Rathner 

Yeah. A really common example is using a personal loan to consolidate credit card debt. If you have debt on multiple credit cards, each one charging its own interest rate, and you are able to continue charging those credit cards while you’re paying off debt—so you’re essentially adding to the debt pile while trying to chip away at it. 
Taking out a personal loan is potentially a way to not only save on interest payments—because they typically charge lower interest rates than credit cards—but it shifts your payments into one equal monthly payment for a set period of time. And for many people, that could be a lot easier to budget for. 

Cassidy Clement 

Yeah. With the different situations like you mentioned, or maybe a certain type of person at a certain time point in their life, what exactly would debt consolidation be considered the most applicable to? Or does it matter upon the circumstance? 
There are some people that may initially start to do their research and go, “Wait a second—this all sounds well and good, but is it actually a good idea?” 

Sara Rathner 

It can be worth examining if a form of debt consolidation would be a good idea for you if you have existing debt and perhaps your financial circumstances have changed otherwise. 
So, here’s an example: let’s say your credit score has increased dramatically over the last couple of years. Even though interest rates are still at pretty high levels, you might qualify for a better loan term than you would’ve been able to get a couple of years ago—especially for very high-interest debt like credit cards. 
And so if that is true for you, it’s at least worth considering: could you be getting a better deal than the one you’re getting right now? 

Cassidy Clement 

Yeah. Something that came up a lot, at least in my research, was the element of cash flow when you look at debt consolidation. 
So maybe basically thinking to yourself, “Okay, based on my cash flow or my current income, and how much are my fixed and variable costs here—what can I consistently cover towards regular payments of that debt?” 
So what other elements are important to keep in mind with that—especially with, like, cash flow or maybe if you’re somebody who works freelance versus someone with a more steady type of income? 

Sara Rathner 

Yeah, that’s absolutely something to consider. Money in, money out is huge—especially, like you mentioned, if you’re a freelancer or contractor and you don’t have a steady paycheck, but rather you’re perhaps paid by the project, or you only work part of the year and then other parts of the year you’re not earning income. 
So you want to think about how your monthly debt payments play off of all of your other financial obligations—your rent or mortgage payment (which is obviously a debt payment), but think about cost of housing, costs of medical insurance, costs of food and gas and childcare, and all of those things that we pay for every month. 
And then: what is debt taking away? What are all those debt payments taking away from the amount of money that you have? Is there something you could be doing to make those debt payments more regular and more predictable so it is easier to budget—or shave off what you’re spending on interest payments over the course of a year or longer? 

Cassidy Clement 

Yeah, that last piece when you’re talking about the year or longer—another element that I came across was this idea of: can you pay things off faster with debt consolidation? 
What are your thoughts on that area? ‘Cause I know that can be one of the initial benefits that people look towards. 

Sara Rathner 

The answer to that is: it depends on a couple of things. It depends, first of all, on the types of debt consolidation loans you would qualify for. What is the length of time assigned to that loan that would give you that interest rate? 
So is it three years? Is it longer? Is it one year? What can you realistically pay off given how much you could spend per month on debt payments? And so that’s absolutely something to consider. Another thing to think about is: are you still getting into debt even though you’ve taken steps to try to get out of debt? Because the bills don’t stop just because you’re making debt payments—you still have to spend money on the things that you need. 
And so something that is hard for many people is taking those steps to get out of debt—whether it’s debt consolidation or rethinking your budget so you could apply more money toward debt payments—but then still having those unexpected costs come in and just blow up all of your plans. 

Cassidy Clement 

To dive into that a little bit more, are there certain benefits or maybe risks that are associated with debt consolidation that people may not think of initially on the surface? 

Sara Rathner 

The benefits—we’ve mentioned this a little bit, but I’ll repeat them, of course—are: if you can qualify for a lower interest rate or a monthly payment that’s doable for your budget, this is potentially a way to help you save on those interest payments while giving you a very defined period of time and a very defined goal, which could be very empowering for a lot of people. 
But of course, the risks are: you don’t necessarily qualify for something that’s better, or it could potentially be a situation where what’s available to you is not what’s actually better. 
Another thing to think about: a lot of ways people consolidate, for example, credit card debt, would be with a balance transfer credit card—which we could talk about in more detail if you’d like. 

But essentially, that gives you a set period of time with 0% interest. You can transfer debt onto that card, not pay interest payments for that period of time. The issue is, if you still have credit card debt once that promotion ends, you’re going to begin owing interest on any remaining balance. And so, you do want to be mindful of the timing of products like these because they might not work as you intend them to if you continue to carry debt. 

Cassidy Clement 

Yeah. So from the perspective of the credit score—and I definitely want to go back to the credit card you mentioned—but from the element of your credit score, initially someone may think, “Wait a second. If I’m already struggling with this debt, would I really want to incorporate more debt because I don’t want it affecting my credit score?” 
How exactly does that all weave together? 

Sara Rathner 

Obviously, anytime you apply for a new loan or a new credit card, there is a temporary ding to your credit score—usually a couple of points. It’s not permanent. And sometimes we’ve talked on my team about, quote-unquote, “spending your credit score” at times when needed. There are times where it makes sense to apply for that loan or apply for that credit card, and so it’s worth it to “spend the points,” quote-unquote.But yeah, you do just want to be mindful of: What am I going to be able to qualify for now at my current credit score?  

Would it be a better move for me to focus for the next couple of months on improving my credit score so perhaps, down the road, I can qualify for something even better—maybe an even lower interest rate, for example? So it’s really: What is the best thing to focus on right now that can help propel you toward your goals in the longer term? 

Cassidy Clement 

And there may be some elements of fees—I guess we can call them in a very ambiguous way—fees. Sometimes people think, “Oh no,” like the big, bad word. But there may be different types of opening fees, origination fees, or maybe balance transfer fees. So, when you were talking about—I think it was a balance transfer credit card—how does all of that come together for an element of debt consolidation? 

Sara Rathner 

Yeah, so a balance transfer card oftentimes charges what’s called a balance transfer fee—very appropriate name—and typically those are 3% to 5% of the transfer balance. So if you are transferring a large balance, you want to be mindful of that because that’s absolutely something to budget for. And it’s annoying to pay a fee, of course. Nobody likes to pay extra money for things—especially when you’re already in debt. 
But if you could save enough on interest to more than offset that fee, then in the end, you would be coming out on top. So there are absolutely circumstances where paying the fee would be a temporary and immediate annoyance, but ultimately worth it. 

Cassidy Clement 

So we’re talking about mainly debt consolidation here today, and we obviously highlighted the benefits, risks, or maybe applicability depending on your situation. 
But sometimes it may not fit everybody’s—and I know this is everybody’s situation—and I know that we’re focusing on debt consolidation, but are there similar alternatives to help with debt management? I know some people say there are different types of consolidation alternatives. Is there anything other than the balance transfer that you want to hit on? 

Sara Rathner 

Yeah. So obviously, your options are different depending on the type of loan or the type of debt you’re considering doing some sort of consolidation for. Student loans, for example, are their own animal because you have federal student loans and also private student loans. You can consolidate loans with the federal government. You can refinance to a private loan, but you would give up some of the benefits that federal loans offer. 

 
So obviously, that is something where you absolutely want to really examine all of your options and understand any potential drawbacks to different paths that you would choose. Medical debt is another situation where using a credit card might not be the only or best option for you. You can start by negotiating some of your debts if they’ve gone to collections—or even going through a line-item medical bill and making sure every charge on there is accurate, potentially negotiating to have some things taken off. So that’s step one. 

Step two is seeing what sorts of payment plans your healthcare provider offers. That might be a better bet for you than putting the cost on a credit card. And then another thing you could do is—similar to balance transfer cards—there are credit cards that offer 0% interest for new purchases for a set period of time. Often, you see 12 months or longer. So if you have a medical procedure coming up that you can plan for obviously, some of them are emergencies—but if there’s something that you have scheduled in the future, you could apply for one of these credit cards that has 0% interest for a long period of time and use that credit card to make the payment for your hospital bills, your medical bills, and then make payments over time at no interest. 

If you don’t have medical debt yet, that is an option. If you currently have medical debt, you can look to balance transfer cards or personal loans for debt consolidation in that case. 

Cassidy Clement 

If you’re someone who, let’s say, was starting out in your credit journey—let’s say somebody just out of school—and you had mentioned that student loans may be a big portion of this, are there certain things to keep in mind if you’re more starting out your credit journey or your financial goals? 

Sara Rathner 

Make your debt payments on time every month—always, even if it’s just the minimum. 
For a lot of people, student loans are the first debt you take on—even before maybe getting your first credit card—because you typically have to be at least 18 to get a credit card, but often 21 if you don’t have a source of independent income. So you might not get your own credit card until you’re already done with your schooling. But you might have credit—student loans—as the first sort of debt you take out. 

Always make at least the minimum payment on time every month. Set up autopay, set up reminders, do whatever you have to do—because when you miss a payment, especially by more than a month or so, it can substantially drop your credit score and it can take a very long time to come back from that. So, as you are beginning your credit journey, just get into the habit of on-time bill payments. Start with your student loans if you have them. If you get a credit card, pay that on time. Make on-time rent payments, on-time payments for utility bills, cell phone bills—those sorts of things can be reported to credit bureaus, so they can affect your credit score. 

But even—here’s the situation: when I bought my house a couple of years back, the mortgage lender needed proof that I had made on-time rent payments for months leading up to buying the house. If you’re missing your rent payments and you want to buy a home, that could get in the way of your ability to qualify for a mortgage. And so that, to me, is the number one habit for people who are just beginning to establish themselves to get into. 

Cassidy Clement 

I think that’s a great point. When we’re talking about debt consolidation, we’re really focusing on the fact that you have a set of debt and you’re looking for something that’s more favorable to yourself—and more advantageous for you, or realistic for you—to be able to pay off. And as you mentioned, you want to set the foundation so that hopefully you don’t have to find a way to collectively pull all of this together and can have a good financial backing or portfolio for yourself. 

But thank you so much for joining us today, Sara. You brought up some awesome points. 

Sara Rathner 

Thank you so much for having me. 

Cassidy Clement 

Sure. So, as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com/campus. Feel free to leave us a rating or review, and find us on your favorite podcast network. 
Thanks for listening, everyone. 

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