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Ask 3 questions to figure out if debt consolidation is right for you, says 'Dear Debt' author

Melanie Lockert
Courtesy Melanie Lockert

Dealing with debt is always tough, and that's before we began navigating these uncharted times. I spent years paying off $81,000 in student loan debt and it affected every aspect of my life, especially my mental health. I've learned how important it is to explore all your options, especially during periods of upheaval. 

That was a hard time in my life, but that experience informs the work I do today. My goal is to help people feel better about money, through my podcast, "Mental Health and Wealth," the Lola Retreat, an event I co-founded that focuses on women and money, and "Dear Debt," the book I wrote about my process to become debt-free.

Right now, you may have experienced a job loss, or you may be dealing with reduced income and increased health costs. If you can't pay your debt, now is the time to contact your lenders to see what might be possible in terms of pausing or reducing your payments for the time being. But if you are able to continue to pay your debt, debt consolidation could be something to consider. 

What is debt consolidation?

Debt consolidation essentially means that you combine your debts, typically through a personal loan or onto a balance transfer credit card. Multiple credit or loan balances are paid off with a debt consolidation loan — now with one new loan, with one payment to manage.

Some cards can also offer low or no interest on balances that you transfer to the card within a certain period of time. This can create an opening to save on interest and make more progress paying off your debt. If you see an ad for a personal loan from an online lender, or a zero percent credit card from a credit card company or bank, you might want to jump on the offer.

But before you agree to anything, do your due diligence. 

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Compare balance transfer credit cards and personal loans among several lenders. Dig in to the fine print so you understand the promotional annual percentage rate (APR) and how long it lasts, as well as any costs like balance transfer fees. For personal loans, check out the repayment term and monthly payment so you know you can afford it. You want to review the terms and conditions and be aware of any related fees.

The next step is to ask yourself these three questions.  

1. Have I addressed how I got into debt?

Before considering debt consolidation, or really any debt payoff strategy, you need to understand the root cause of your debt. Your debt could have come from college loans or unforeseen medical expenses, or it could be that making and sticking to a budget is something that you have struggled with in the past.

If you know that part of your debt stems from overspending, debt consolidation may not be the best solution. This is especially true if you wanted to use a balance transfer credit card. Though these cards can save you money on interest, it's also another credit card, which could potentially be another means to add to your debt. 

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Instead, consider using the debt avalanche method and focus on repaying your highest interest debt first. You can consider sticking to cash or debit while you get your spending under control, too.

I recommend unsubscribing from sale emails and removing your credit card info from any retail sites to add a step to any potential purchase, especially one you may not need.

2. Will I save money? 

One of the simplest ways you can see if debt consolidation would work for you is to find out the interest rate you might get. You should be able to see what loan and APR you'd prequalify for with a potential lender before making any decisions.

The better your credit score — good scores are between 670 and 739, while very good scores are 740 and above, according to FICO — the better rate you can typically get on a loan. If your debt has already affected your credit, it also may be tougher to get approved for a loan, or you may have a higher APR. 

Many balance transfer cards promise 0% interest during the promotional period, which can last from six months to a year or more. But once that is over, you could also find yourself having to deal with an interest rate that is even higher than the one you have to pay right now. 

Ultimately, if that rate won't save you money in the long run, instead of choosing debt consolidation, you can focus on paying off high-interest debt and making on-time payments to improve your credit. Be consistent with payments and pay more than the minimum. As your credit improves, you may be approved for a better rate later on. 

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3. Will I be able to pay off my debt? 

Let's say you get offered a balance transfer credit card with a zero percent APR for a year. To figure out if the move is worth it to you, take your debt amount and divide it by the number of months for your promotional period. 

If you're consolidating $15,000 in credit card debt over a 12-month period, that means you'd need to put $1,250 towards your debt each month to get the most out of the card and become debt-free. If you won't be able to pay off all of your debt or make significant progress during that low or no interest period, it likely won't make sense to sign up for it. 

It's also important to remember that applying for a new line of credit can result in a small drop in your credit as your credit report is checked by the lender. Working to pay off your debt will also improve your payment history, which is good for your credit score. 

Before you commit to any debt payment strategy, make sure you understand the implications for both your immediate and long term financial future. This is a process that can be overwhelming, so don't be afraid to reach out and speak to a financial advisor about your best options.

Melanie Lockert is the founder of the blog and author of the book "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, Time, Huffington Post, and more. Melanie writes about student loans, credit, and mental health. You can find more info at Melanie Lockert.

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