Debt Consolidation (also known as Bill Consolidation) is not right for all people or all situations. While it can sometimes dramatically help your financial situation, there are other times when it can actually hurt it. You may end up paying more interest, lose your home, or be in debt longer.
What you don’t want to do is pay a credit counselor to do things that you can do on your own for free. For example, you should never pay any company to “clean your credit record.” There is nothing they can do other than remove incorrect information from your credit report and consumers may do this for themselves for free. You also do not need to pay someone simply to receive a new payment plan from a creditor. You can call your credit card company directly. Many banks have an in-house program that will work with you to create a debt reduction program.
If you have a hard time controlling your spending, debt consolidation may make budgeting your money more difficult. You may feel like you have less debt since there is much less urgency to pay it off. Consolidating your loans will also free up space on your credit cards, which means there is the possibility of racking up more debt. It is important to remember that no matter what program you use you will still have to pay all of your debt plus interest back. Debt consolidation is a short-term fix for a large problem.
Another danger of debt consolidation is the possibility of losing your home. No matter how much you owe a credit card company, they cannot take your home. But once you sign those consolidation papers your home is up for grabs. If some sort of unexpected financial hardship comes along, you risk being homeless.
Besides risking your home, consolidation can hurt your credit. By applying for a new credit line and closing old accounts, you may damage your FICO credit score. While often times the benefits outweigh the downside of losing a few points, this is definitely something to consider.
Debt consolidation should be a means that allows you to pay your bills off more quickly and thereby pay less money. The problem is that many programs are designed to do the exact opposite. Companies that promise to cut your payment in half and offer lower rates are not thinking about your financial welfare, they are thinking about their own bottom line. The less you pay each month, the more you will pay in the long run, even with a lower interest rate. It is therefore profitable for a company to “help” you get a reduced monthly payment. This method is far from a solution. It will cost you more and it does nothing to address or stem the true problem; overspending.
Chris Viale the general manager of a nonprofit credit-counseling agency called Cambridge Credit Corp., says that 70 percent of Americans who take out a loan to pay off their credit cards end up with the same or higher amount of debt within two years. If spending habits do not change, there is no program that will be able to keep you out of debt.
All of these factors must be considered before you decide to consolidate your debt. Only a true understanding of the costs and benefits will allow you to make decisions that lead to healthy finances.
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