Does debt consolidation actually work?

Debt consolidation replaces several debts with one loan. The pitch is simplicity and a lower rate. The reality depends almost entirely on what happens afterwards.

Why credit card debt is so hard to clear

Minimum repayments are engineered to service the balance, not retire it. On a $15,000 card balance at around 20%, paying only the minimum can take well over a decade and cost more in interest than you originally borrowed.

A consolidation loan converts that into an amortising debt: every payment reduces principal, and there is a final payment with a date attached.

The three conditions

Consolidation works when all three of these hold:

1. Your weighted average interest rate falls. Not just lower than your worst card — lower than the blend of everything being consolidated.
2. The new repayment is genuinely affordable. Comfortably, with room for a bad month.
3. The old accounts are closed. Not paid down. Closed.

Two out of three usually leaves people worse off within a year.

The term trap

A longer term always produces a smaller monthly figure. It usually produces a larger total cost. Stretching $25,000 from three years to seven cuts the monthly repayment substantially but can add thousands in total interest.

That is not automatically wrong. If the shorter term is unaffordable, the longer one is the responsible choice. But it should be a decision made with both numbers visible, not a default.

When consolidation is the wrong tool

• When the consolidated repayment still exceeds what you can afford. A loan delays the problem and adds a term to it.
• When the debt is small enough to clear within a year by targeting the highest-rate balance directly.
• When the debt is ATO or fines. These have their own arrangements, usually cheaper than commercial credit.
• When the underlying issue is that expenses exceed income. Restructuring does not create capacity.

What it does to your credit file

Expect a small short-term dip from the new enquiry and new account. Over the following months, consistent on-time repayments on a single loan typically improve your file more than carrying several near-limit cards, because credit utilisation falls and repayment history builds.

How we approach it

We calculate your current weighted average rate and total monthly commitment, then compare it against what our panel can actually offer you. If consolidation does not improve your position, we say so. A loan that does not help you is not a good outcome for anyone, and our best interests duty makes that a legal obligation rather than a preference.

Quick answers

Will my credit score drop?

Usually a small dip initially, then improvement as utilisation falls and clean repayment history builds.

Can I consolidate if I have missed payments?

Frequently, yes, provided you are employed and earning at least $30,000 a year. Missed payments are common among people seeking consolidation.

Do I have to close my credit cards?

Most of our lenders require it as a condition of approval, and we think they are right to.

Can I include buy-now-pay-later?

Usually. Lenders increasingly treat BNPL as ordinary credit, and several will pay it out as part of a consolidation.