All of the many benefits of debt consolidation may leave little doubt that it’s the way to go. One reader asked if there were any down sides to debt consolidation and here’s what I came up with.

The main down side comes in the form of an opportunity cost. If you take out a loan and use it to consolidate your debt, you’re passing up the opportunity to use the loan proceeds for another purpose. If you could invest that money in a way that was more profitable than the rate of your high interest rate debt, then you might be better off not consolidating. The problem with this idea is that credit card interest tends to be so high that it would be difficult to find a better alternative. Taxes on alternative investments make consolidating even more attractive.

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With the current crisis in the mortgage industry, the likelihood of getting a mortgage with little or no money down is considerably less. Usually coming up with 10% down is sufficient to get a loan. The major drawback of putting down less than 20% is that you almost always have to pay PMI.

The method I used to avoid paying PMI on my first house was something called an 80/10/10 mortgage. The idea is that once you put 10% down on your house, you automatically have 10% equity in your home. That most likely qualifies you for a Home Equity Line of Credit for at least 10% of the value of your home. Taking out that credit effectively allows you to double your downpayment and avoid PMI.

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Before we get into why you would consolidate your debt, let’s make sure everyone understands what debt consolidation is: Moving all of your current debt to fewer sources of debt. What that means to most people is using a loan (or even a credit card) to pay off their other debt.

Why would you consolidate your debt?

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To help protect myself against identity theft, I subscribe to a credit monitoring service for about $75 a year. The service grants unlimited review of my credit report, but the real value is the alerts that I can setup on my reports.

I have my service configured to alert me anytime there’s unusual activity in my credit reports. This includes applications for new credit, change of address, activity on dormant accounts, as well as balance changes on my revolving credit. It’s nice to get an email that says that my credit card bill jumped by a certain dollar amount or percent that I’ve setup. Then I can compare against my spending to see if it’s due to a purchase I made, or if something is awry.

There are other methods and services to guard your identity and credit report, but this is the one that I have found to be most useful with minimal cost or time investment.