Dave Ramsey says debt consolidation solves nothing. Is he right ?

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Debt consolidation is a frequent recommendation for those trying to get their debt under control. If you are unfamiliar with how debt consolidation works, it’s about getting a new loan or credit card and using it to pay off all your debts. You then only have to make one monthly payment, possibly with a lower interest rate.

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

So, is debt consolidation worth it, or is Ramsey right? 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 actually having done anything. As he says, “It makes you feel like you’ve really done something to change your whole financial outlook when you haven’t.”

According to Ramsey, what puts you in debt in the first place is your financial habits. That’s why he believes changing those habits is what’s important.

When you consolidate debt, you might have a lower monthly payment. You will certainly have fewer payments to manage. But in Ramsey’s view, it’s just tossing around the same old debt. You haven’t addressed the real problem, which is the behaviors that led to your debt.

What Ramsey is saying is that getting rid of debt is all about strict budgeting and creating new financial habits. He’s right there, at least with the debts caused by overspending. However, it is not fair to say that this is the problem for everyone. Many problems can lead to debt, some of which are not entirely within a person’s control, such as medical problems or sudden loss of income when living paycheck to paycheck.

But on the whole, it’s true that get out of debt is mainly about following good financial habits. But like many of Ramsey’s views, his stance on debt consolidation is extreme.

Debt consolidation can take your repayment plan to the next level

In his response to a reader on debt consolidation, Ramsey wrote that “interest rates aren’t the issue, and the number of payments you’re facing isn’t the issue.” Maybe so, but all things being equal, most people would probably accept a lower interest rate and lower monthly payments.

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

  • Credit cards with balance transfer offer a 0% introductory APR on the balances you transfer. The introductory period can last 18 months or more with some cards, giving you some time to pay off what you owe.
  • Debt consolidation loans are personal loans intended to pay off an existing debt. These give you a fixed payment term, with lenders normally offering terms of between 24 and 84 months.

Ramsey is right that there is no trick to paying off debt. If you spend more than you earn, you will end up in debt. If you consolidate that debt and then continue to spend more than you earn, you won’t make any real progress. Your now consolidated debt will increase and you will find yourself back at square one.

The key is to cut expenses and spend as much money on your debt as possible. And if you do that, debt consolidation is a great way to speed up the repayment process.

To illustrate, let’s say you have a debt of $5,000 spread over different credit card, and you can pay $300 per month for it. You could pay this at an 18% APR. Or, you can transfer it all to a balance transfer card with an introductory APR of 0% 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 3% balance transfer fee) and be reimbursed in 18 months.

Debt consolidation will not do the work for you. You will still need to make those monthly payments and avoid any new debt. But it can help you pay off your debt sooner, reduce the number of your monthly payments and, most likely, save money on interest.

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John A. Bogar