Dave Ramsey Says This Common Debt Payoff Approach Is 'Like a Dog Chasing Its Tail'

Should you skip this debt payoff approach that reduces the cost of your debt?

If you're trying to pay off debt, you probably feel like you can use any help you can get. That's why so many people look for ways to reduce their interest rate so more of their payment can go toward principal.

Although that's a sound approach, Dave Ramsey doesn't necessarily think that a common debt payoff technique designed to achieve this goal is a good one -- even if it could reduce the total amount you pay to your creditors.

Here's what this payoff approach is, and why Ramsey doesn't like it.

Dave Ramsey believes you should skip this paying technique

So, what's the debt payoff method Ramsey warned about? It's taking out a personal loan to consolidate debt.

See, many people who have high-interest debt, such as credit cards, can qualify for a personal loan at a lower rate. They can then use that personal loan to pay off one or more of their existing creditors who are charging higher rates. The personal loan will come with a set payoff time and, with the lower interest rate, more of each payment will go toward principal. This typically reduces the time and cost involved with repayment.

But, Ramsey doesn't think this is a good idea.

"When faced with either a 17% interest rate on your credit card or a 9% interest rate for a personal loan, we get why you might want to take out a loan to cover your unpaid credit card balance," Ramsey says. "But this is like a dog chasing its tail. All you're doing is using debt to pay off debt and extending your loan term -- which means you'll actually pay more over time."

Ramsey says this approach won't actually help you and the only way to get out of debt is to change your behavior and your mindset.

Is Ramsey right?

Here's the problem with Ramsey's advice. Consolidating debt does not necessarily extend your loan term, and it does not necessarily mean you will pay more over time. In fact, many people who use a personal loan to consolidate debt make smart decisions to ensure that doesn't happen and they save a ton of money in the process.

If you have a credit card that's charging you a lot of money in interest, you could end up taking decades to pay it off if you're making only minimum payments. Most of what you send to your creditors each month will be eaten up by interest and your principal balance will decline very slowly.

If you can refinance using a personal loan that cuts your interest rate in half, you will not waste nearly as much money on interest with each payment. You'll make more progress repaying your balance and becoming debt free when you aren't paying an astronomical interest rate. Your personal loan will also have a set payoff time, which will usually only be a few years max, so you'll know exactly when you are going to be debt free -- unlike when you have a credit card.

Now, if you simply keep refinancing debt forever instead of paying it off, then Ramsey would be correct and you'd be like that dog chasing its tail that he talked about. The same is true if you consolidate debt, work on paying off your loan, and start charging on your cards again.

But if you find a low-interest personal loan, you choose a loan with a reasonable repayment time, and you commit to not getting back into debt again, your consolidation loan can actually help you make great progress on becoming debt free.