Lenders and banks often sing the praises of debt consolidation, highlighting its seemingly numerous benefits: lower interest rates, accelerated repayment timelines, and in many cases, the potential for an improved credit score. It sounds almost too good to be true.

But first, let's define debt consolidation. This financial strategy involves merging multiple debts into a single new loan, which can lower the overall interest rate or monthly payment. The aim is to make repayment management easier.

Why is debt consolidation often too good to be true?

Financial coaches unanimously point out a common pitfall: individuals who consolidate their credit card debt into one loan frequently end up rebuilding their credit card balances while still paying off the consolidation loan. The Consumer Financial Protection Bureau warns, "Taking on new debt to pay off old debt may just be kicking the can down the road." Many fail to eliminate their debt by incurring more debt unless they also reduce their spending.

All things considered, however, there are many benefits to debt consolidation if it is done right:

1. A TransUnion study points out that many people see a 20-point credit score bump because their credit utilization rate goes down.
   
   
2. By lowering your interest rate with debt consolidation, you can put more money toward your balances and less towards interest. As a result, you can pay off debt faster and save money. 

How to reduce the risks of a consolidation loan?

1. Balance your budget first. Before considering a consolidation loan, ensure you have been successfully reducing your credit card debt for several months. This experience significantly lowers the likelihood of accruing higher balances on your cards after obtaining a consolidation loan, as you've cultivated a habit of prudent spending.
   
   
2. Try a different strategy first. Although the debt snowball method may not immediately lower your payments, it carries no risk of accumulating further debt. Additionally, it helps you develop the habit of paying extra towards your current debt, preventing you from backsliding if you choose to refinance with a consolidation loan. 
   
   
3. Talk with a money coach or credit counselor first. Speaking with a money coach or credit counselor can provide insights into your unique financial situation and help determine whether a consolidation loan is a suitable option. For example, a membership with Budge offers access to a financial coach, enabling you to explore debt consolidation and other strategies effectively.

While debt consolidation offers an attractive solution for managing and repaying debt, it's crucial to approach it with a comprehensive understanding of its potential pitfalls and prepare adequately to avoid kicking your debt can down the road.