Should I Consolidate My Debt? | YNAB (2024)

If you have a long string of debts that feel overwhelming to manage, you might be asking yourself, “Should I consolidate my debt?”

Before you take any steps, I want to explain a few things that are very important to consider when making the debt consolidation decision.

Home Equity Loans Put Your Home at Risk

Not too long ago, Americans’ greatest asset was the equity in their homes. However, banks have targeted the home equity loan aggressively in the last several years. This has caused a dangerous shift in the net worth statements of Americans. What was once an asset can now become a liability.

The consolidation offer might be extremely enticing: you have nine credit cards, all with outstanding (well…the credit card companies sure think so) balances. You have to pay nine separate times each month, and the interest rates on these cards are pretty high to boot. The bank comes along and offers you a home equity loan that will pay off all of your credit card debt.

It sounds like relief…now you just make one simple monthly payment instead of nine, and the interest on this home equity loan is so much lower. All of the numbers make sense. But if you’re wondering, “Should I consolidate my debt with a home equity loan?”

The answer: It’s probably not a good idea.

You Haven’t Changed Your Behavior

Picture this: you still have nine credit cards. Thanks to your home equity loan, all of them have zero balances and it feels good. Then your consumer side starts to whisper: “You’ve got some leeway, a buffer, a cushion for those extra things you need!” And eventually, you give in. With a simple wave of a hand, your wants become your needs, and the credit card balances begin to climb.

On top of these new and enticing zero balances, your home is now at risk. You have taken on secured debt in the form of a home equity loan. But the only people that feel secure are the banks. You fell prey to the illusion of security and have failed to do something extremely critical to your financial security: you didn’t change your behavior.

Check out our comprehensive guide for more information about how to get out of debt.

Treat the Problem, Not the Symptom

If you choose some form of debt consolidation loan, you have probably made a wise choice by the numbers. If you open a zero-percent-for-six-months balance transfer credit card for all nine cards then you have probably made a wise choice by the numbers. But you haven’t changed your behavior. You’re treating the symptom, not the problem.

Hear the story of Lindsey’s nightmare with a 0% credit card.

Scariest of all, now that you have your credit cards consolidated into one card, or a home equity loan, you still have those available lines of credit. And you haven’t learned to live without credit. You haven’t learned to live within your means. You haven’t learned to manage your personal finances. This move of consolidation has brought you to a better place financially for the time being. But if your behavior does not change now, you will end up in a far worse situation than you had even before consolidating.

Interested in changing your behavior? First, stop spending on credit cards. Second, live by a budget. Third, experiment with YNAB’s Loan Planner tool so that you can see the impact of extra payments:

Three Key Requirements for Debt Consolidation

If after reading the above, you’re still asking, “Should I consolidate my debt,” know that I am not against consolidation (examined on a case-by-case basis) if you have already changed your behavior.

I’d say you qualify for loan consolidation if you meet these three key requirements:

1. You have one month of expenses saved.
2. You are in control of your money.
3. You are just bursting at the seams to absolutely destroy your debt.

If you can check those three boxes (all of them!), I do hereby qualify you as someone who may consider consolidation. The numbers make sense and your behavior has changed.

If you have not changed your behavior then consolidation is the absolute worst thing you can do to get out of your present situation. It will only suck you back in even deeper. Finance is not about numbers nearly as much as it is about behavior.

Make the change and you will thrive.

Living paycheck to paycheck and feel out of control financially? Create a spending plan with a free 34-day trial of YNAB. Take back control of your financial life for good.