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Dave Ramsey Says Debt Consolidation Doesn't Solve Anything. Is He Right?

The Ascent logo The Ascent 8/6/2022 Lyle Daly
A person sitting at a desk and filling out paperwork. © Getty Images A person sitting at a desk and filling out paperwork.

Debt consolidation is a frequent recommendation for those trying to get their debt under control. If you're unfamiliar with how debt consolidation works, it involves getting a new loan or credit card and using it to repay all your debt. Then you only have one monthly payment to make, potentially with a lower interest rate.

It may be popular, but there's one finance personality who isn't a fan. When a reader asked Dave Ramsey if debt consolidation is a good way to get out of debt, his response was an unequivocal no.

So, is debt consolidation worth a shot, or is Ramsey right about it? Let's find out.

Why Dave Ramsey is against debt consolidation

Ramsey's argument against debt consolidation is that it gives you the illusion of progress, without having actually done anything. As he puts it, "It makes you feel like you truly did something to change your whole financial outlook when you didn’t."

The thing that gets you into debt in the first place, according to Ramsey, is your financial habits. That's why he believes changing those habits are what's important.

When you consolidate debt, you might have a lower monthly payment. You'll definitely have fewer payments to deal with. But in Ramsey's view, that's simply shuffling the same old debt around. You haven't addressed the real problem, which are the behaviors that led to your debt.

What Ramsey is saying is that to eliminate debt, it's a matter of getting on a strict budget and building new financial habits. He has a point there, at least with debts caused by overspending. However, it's not fair to say that's the issue for everyone. There are lots of problems that can cause debt, some not entirely in a person's control, like medical issues or a sudden loss of income when living paycheck to paycheck.

Overall though, it's true that getting out of debt is primarily about following the right financial habits. But like many of Ramsey's opinions, his stance on debt consolidation is an extreme one.

Debt consolidation can take your repayment plan to the next level

In his response to a reader about debt consolidation, Ramsey wrote that, "Interest rates aren’t the problem, and the number of payments you’re facing aren’t the problem." Maybe so, but all things being equal, most people would probably take a lower interest rate and fewer monthly payments.

Those are both a possibility with debt consolidation, at least if your credit score is high enough. There are two popular options out there:

  • Balance transfer credit cards offer a 0% intro APR on balances you transfer over. The intro period can last for 18 months or more with certain cards, giving you quite a bit of time to pay off what you owe.
  • Debt consolidation loans are personal loans intended for paying off existing debt. These get you a fixed payment timeline, with lenders normally offering terms between 24 and 84 months.

Ramsey is right that there's no trick to paying off debt. If you spend more than you earn, you'll end up in debt. If you consolidate that debt, and then keep spending more than you earn, you won't make any real progress. Your now-consolidated debt will grow, and you'll end up back at square one.

The key is cutting expenses and putting as much money as you can toward your debt. And if you do that, debt consolidation is a great way to accelerate the payoff process.

To demonstrate, let's say you have $5,000 in debt spread across different credit cards, and you're able to pay $300 per month toward it. You could pay that off at an 18% APR. Or, you could move it all to a balance transfer card with a 0% intro APR for 18 months. Here's what the difference would be:

  • Without debt consolidation, your debt would cost you $5,797 and be paid off in 19 months.
  • With debt consolidation, your debt would cost you $5,150 (the original amount plus a 3% balance transfer fee) and be paid off in 18 months.

Debt consolidation isn't going to do the work for you. You'll still need to make those monthly payments and avoid any new debt. But it can help you pay off your debt sooner, cut your number of monthly payments, and most likely save you some money on interest.

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