What You Don't Know About Debt Consolidation Could Hurt You

Debt consolidation is becoming an increasingly popular way to control finances in this day and age of difficult economic times. It is the process of taking several individual loans, credit cards or other accounts you have to pay on monthly and paying them all off with a new larger loan or credit card that is large enough to hold all of their balances. The consolidation loan can come in one of several forms such as a home equity loan or line of credit, a new personal loan or a low-rate credit card with the option to transfer balances of other cards onto it.

While this can seem like a convenient and foolproof way to save time and money on making many smaller payments at once to several debts, some of which may have high interest rates, there are some potential downsides and serious pitfalls you should be aware about in order to avoid finding yourself even worse off.

1. Can this leopard change its spots? - To get to a position of needing debt consolidation requires that, for whatever reason, you borrowed more money than you could easily handle and manage. Taking out a consolidation loan may be just another way of continuing the same habits that got you in trouble in the first place. Too many people get a consolidation loan, pay off old debts and don't close those accounts. In a matter of 2 years, 70% of consolidation loan borrowers have run up the same old debts they had before. Unless you're prepared to truly take control of your finances with a budget and a plan, it could really turn out to make matters much worse in the long run.
2. Scams to take advantage of desperation - People who are looking for credit consolidation are usually desperate for financial relief and just want to hear someone -- anyone -- tell them that their situation will be okay and that they will get through it. Unfortunately there are many scam companies out there who will say or do anything in order to convince you to pay them a fee for what amounts to little or no help at all. If you are looking for a debt management company to help set up your debt consolidation, do extensive research before deciding what company you should work with.
3. Improper math leads to deeper debt - With certain kinds of debt it can be difficult to tell exactly how much you owe when you calculate the interest and how long it will take you to pay off the loan at scheduled rates. Many people often make the mistake, if they have several credit card debts, of simply adding up their minimum monthly payments and thinking that if they can get a consolidation loan with a smaller payment they will be saving money. That is often far from the truth as making a smaller payment over a longer period of time will often cost you much more in interest.
4. Relying on low-interest rates - You've probably received credit card offers in the mail promising you a low or even 0% interest rate for a credit card for all balance transfers, but those rates do not last forever. Some of them may charge (up) in as little as 3 months after you open the account. The adjustment on these cards just about always trends up, leaving you surprised and holding the bag for a larger portion of debt than what you started with.

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