Debt consolidation is a great way to restructure your debt payments so it becomes easier to meet. The idea is to simplify the payment process by combining multiple debts into one. For some people, this is good enough for them. Not everyone needs a debt reduction. Their finances can afford all the payments. The difficulty lies in maintaining all the payments because there are too many credit accounts to monitor. Their busy schedules make it difficult for them to concentrate on their debt payments. This can lead to all sorts of mistakes that could waste your time and money. It can also cost you a good credit score.
In case you are certain that consolidating debt is the best option, you need to do a double take before you finalize your decision. It is true that it can improve your credit situation but only if you can avoid the 10 debt consolidation traps that can compromise its positive effects.
Trap 1: You think that debt consolidation will solve everything
The first trap is the assumption that this debt relief program will solve everything. First of all, it does not solve the problem of your debt. Although your multiple debts will be paid off, it is usually funded by another debt. That means you still owe credit but with another lender this time. It may have new and better terms, but it still needs to be paid. Your debt situation is not over. In fact, it may just be starting.
What you accomplished is to restructure your debt so it becomes easier to pay off. It will not solve everything, but the consolidation process should make the debt solution easier to complete. You only completed one phase towards the road to debt elimination. But the journey is far from over. You still have a lot of payments to submit. It is just that after consolidating, the payments are easier to monitor.
Trap 2: You assume that the root of the problem is solved
Debt consolidation will not solve the root of the problem. It only treated the symptoms – but not the actual financial sickness. That means you are concentrating on making the effects of debt easier to live with. But you are not dealing with what caused the debt in the first place. If you want to solve your credit situation once and for all, you need to take care of the root of the problem first.
There are many reasons why you ended up with multiple debts.
- You have multiple credit cards and you are reckless in using them. Credit cards can pose a huge temptation to spend money that you do not have. The convenience of using this purchasing tool and the high-interest rate can quickly increase your debt balance.
- You do not have an emergency fund. Even if you are responsible with your use of credit, if you do not have an emergency fund, you might be forced to take on too much debt after a trip to the ER. A car accident can also cost you a lot in the repair shop. If you do not have an emergency fund ready, where will you get the money to get yourself out of a tight fix? Chances are, you will use credit.
- You are trying to keep up with the Joneses. Wanting to boast of your financial success is a dangerous attitude. It brings about the need to keep up with those around you – even if your finances can no longer cope with it.
These are only a few of the causes of too much debt. Unfortunately, consolidating debt will not address any of these root causes. So if you will continue to consolidate debt, make sure you have a different plan to ensure that the root cause of the problem will not compromise your financial future again.
Trap 3: You fail to research your options
Even if you are very sure that debt consolidation is the answer to your credit issues, you are still encouraged to look at the other debt solutions. Unless you have the complete list of options, you can never be sure that you are choosing the right option.
Choosing the wrong debt solution might be costly for you. It could lead you to waste both time and effort on solving your debt problems. Sometimes, you feel like you only need to restructure your debt but as it turns out, what you really need is debt reduction. In that case, you should opt for debt settlement and not debt consolidation.
In case it is consolidation that you need, you should also choose the right way to consolidate debt. Most people would think that getting a loan is the best way to consolidate their multiple credit accounts. But if you have a low credit score, you might be better off with debt management. The latter is also a great option if you know that you need the help of a debt expert to get rid of your credit problem.
To find the right way to consolidate your multiple credit accounts, you should look for well researched debt consolidation reviews. These will help you peek into the experience of other consumers who went through the different debt relief options. Through their review, you can make a more calculated and smart decision about the type of program you will use.
Trap 4: You consolidate the wrong type of debts
You can consolidate all types of debt. However, there are some debts that are better left alone. There are those that are best consolidated. You need to find out which is which so you can identify the debts that you will combine with others.
One of the ways that you can choose is by looking at the interest rate. If the interest after consolidating the debts is higher than the rate of the original debt, then do not consolidate it. For instance, student loans have a low-interest rate to begin with. If you include it in the debts you will consolidate through a balance transfer card, that could make you pay more on the student loan. While the balance transfer starts with a very low-interest rate or even a 0% introductory rate, that will not last forever. If you cannot pay the equivalent amount of the student loan by the time the low or zero rate expires, you will end up with a much higher interest rate than the original. Do the calculations to determine which will be beneficial for you.
It may be true that it becomes manageable but if it will make you pay more, then it will not really mean a lot on your finances.
Trap 5: You agreed to a higher interest rate
This is one of the biggest mistakes that you can do – to agree to pay a higher interest rate when you consolidate. When you consolidate, you have to accept that there will be changes in your debt. While you may be forced to compromise on some of them to reach your financial goals, the interest rate should not be one of them.
In case you will end up paying more on the interest, take a step back and analyze the situation. Find out why you are being given a high rate. If it is caused by a low credit score, postpone your consolidation efforts for now. Work on improving your score before you go and try to consolidate once more.
Your credit score plays an important role in determining your creditworthiness. If you are deemed creditworthy, that means you are responsible for your use of credit. The lender will trust that you will not run off without paying them. That means they will not feel the need to give you a high-interest rate.
Sometimes, the high-interest is also caused by the loan itself. Look into the different loan or consolidation options. Maybe you chose the wrong strategy. It pays to understand your financial situation and the option you have to consolidate. That would help you choose the perfect debt relief program.
Trap 6: You concentrated too much on the interest rate
It is important to avoid the high-interest rate but it is also important to look at other factors as well. Consolidating debt is more than the interest rate. Make sure you also consider the other fees that you need to pay. For instance, if you opted for balance transfer because of the 0% interest rate do not assume that this is the only thing to consider. For one, this rate is only for a short time – usually a few months to a year at the most. Once the introductory period expires, the card will assume a high-interest rate. Not only that, this option charges a balance transfer fee. This means you will be charged a fee upfront when you consolidate your balance on this card.
The same is true for debt consolidation loans. A lender may offer a low-interest rate but charge a high underwriting fee or origination charge. They can also charge a high prepayment penalty. That means trying to get out of debt early will cost you extra. Consider these factors before you finalize your intentions to consolidate debt. Always do your calculations well.
Trap 7: You put your trust on the wrong debt expert
Another trap in debt consolidation is putting your trust in the wrong debt expert. Obviously, this trap is for Debt Management. This is the only option to consolidate debt that involves a debt professional.
For some people, hiring a professional to help with their debt situation will allow them to concentrate on other things in their life without compromising their debt payments. If you have the money to pay these professionals, you can hire them. However, you have to make sure that the company you will hire is not a scam but a legitimate business.
How do you know this? By reading reviews and doing thorough research. Look at their website to see what they advertise. Read through reviews to see how previous clients rate them. You can also visit authority websites like the Better Business Bureau (BBB). Companies like National Debt Relief have a high rating of A+ with the BBB. Make sure you call number #1 debt consolidation Company so you can be sure that you will get the best debt relief service in the industry. There are also review sites like the Top Ten Reviews that provide readers with the necessary points why a company is ranked high or low. Scrutinize each and every company so you will be sure that you will get the best value for your money and a sincere help for your debt issues.
Just remember, a scam company will offer you things that are too good to be true. But usually, they will not deliver. Trust your gut instinct. If something seems too good to be true, it maybe is. Just walk away.
Trap 8: You assume your debts are paid off – false sense of complacency
The eight trap that you can fall into when consolidating debt is having a false sense of complacency. Some people think that they have solved their debt problem. That is a wrong assumption. Consolidating debt only makes the payments easier. However, it does not involve any payment yet. You are simply transferring what you owe to a different lender or account. It is not reduced. It is not paid off. You still have to go through the payment process.
You will try to lower the interest rate but the balance will usually still be the same. This is why it is very important not to assume that your problems are over. You still have a long way to go when it comes to paying off your debts.
This false sense of complacency will remove the stress of having debt but it might make you confident to use credit once more. Some people use their credit cards once more. For instance, when you use debt consolidation loans to pay off your credit cards, the zero balance will make you feel like you can use credit again. Remember, you still owe the same amount of money. Make sure your credit use will be very cautious while you are still completing your consolidation program.
Trap 9: You do not have a solid and realistic repayment plan
Since this debt relief program only restructures your balance, you should still have a separate repayment plan in place. Right after the consolidation, that is the only time you can start with the payments.
The good news is, most of the options to consolidate debt come with a repayment plan. For instance, debt consolidation loans, whether it is a personal loan or a home equity loan, come with repayment terms. However, you can choose to make bigger payments to end the loan earlier – as long as there are no prepayment penalties. Debt Management has a DMP that is submitted to creditors and lenders for approval. That means it would be very hard to change it once it starts. Probably the only option that does not have a formal repayment plan is a balance transfer card. So you can set the pace for the payments according to your current capabilities.
It is important to remember that the longer the repayment plan, the more you will pay in the long run. So if you can stretch your budget, try to pay as much as you can in as little time as possible. That is how you save when you consolidate debt.
Trap 10: You put your house in danger
The final trap in debt consolidation is using your house. This refers to getting a Home Equity Loan to fund the payments of your multiple credit accounts.
The equity refers to the value of the house that is already yours. It is usually the portion of the mortgage that you have already paid off. Since this is already a part of your net worth, you have every right to use it. However, you need to think this through.
When you use a Home Equity Loan to pay credit cards or a personal loan, you will be putting your house in danger. If you do not pay your credit card debt or personal loan, the worst that can happen is your credit score will go down. But if your house is used as collateral, it can be foreclosed on.
Make sure you will not use your house to consolidate debt unless you have a clear repayment plan in place. Otherwise, you might end up losing it in the end.