Debt consolidation seems like an act of providence to anyone drowning in debt. The idea behind it is that all your lines of credit, loans, and credit cards get “consolidated” or lumped together into a single sum with a lower interest rate, lower minimum payments, and a single due date. All this sounds wonderful, but if not executed properly and with the right people, you could be in a bigger problem than you are now. It is worth keeping in mind that debt consolidation is only a tool, a means to an end, which does not put an end to your woes but makes them easier to deal with if used right. There are some mistakes which many consumers make along the way, and here’s how you should deal with them.
1: Not Facing the Cause
Most people who turn to consolidation do so because they weren’t able to limit their spending habits and are now unable to handle the repercussions. The consolidation is a knee-jerk reaction, but if you don’t face the cause, you’ll fall right into the same pit all over again. You must realize that the debts didn’t build up overnight and that you have to engage in active rehabilitation to get away from the harmful habits which got you in this situation in the first place. Don’t gloss over your bad decisions or avoid them. Face them, retrace your steps, seek professional help from a money coach, adviser, or credit counselor if needed, but definitely look into ways you can reduce spending. A good idea is to see if you are being able to stick to the new regimen for a couple of months; because if you aren’t, debt consolidation won’t really work for you.
2: Not Doing Enough Research
Debt consolidation is actually quite multidimensional. There are several options ranging from unsecured and secured loans to debt pooling on balance transfer credit cards and transferring all outstanding debt onto an existing or a new line of credit. There are tons of alternatives to consolidation too, and while consolidation is definitely a very good option in a number of cases, you will find that there are other methods more suited to certain situations. In this case, the only thing you can and definitely should do is to do as much research into debt management as you possibly can. Even further down the process, if you don’t know what you’re getting into and end up signing a deal with unfair or deceptive terms, it could become very harmful for you.
There are plans which have large costs upfront like credit card balance transfers, and others which have an attractive and low rate for a promotional period but then a steep one soon after. You must be proactive in your research. Collect pamphlets, visit websites, try live chats and phone calls with their representatives, put all your cards on the table and see which option is best for you.
3: Consolidating the Wrong Debts
A lot of naïve customers end up consolidating every single debt they have, even the ones with very low interest rates like student loans and low-interest credit cards. All this does is increase the interest you pay on them every month, trading it for increased convenience. This is definitely not worth it and should be avoided. The only solution to this is to analyze all your debts before you opt for debt consolidation. Categorize your debts on the basis of interest and then put only the high-interest rates into your debt consolidation loan. Keep the low-balance and low-interest ones separate.
4: Working with the Wrong Agency
The private finance sector, especially the debt settlement industry has gained quite a reputation for having a number of companies which employ shady and borderline malicious practices and are very aggressive in their marketing. There are some firms which force deals by withholding payments for months. While playing hardball could coax the creditor into playing along, it severely damages your credit score. Some firms charge hefty fees before any results are obtained.
Not all nonprofit agencies are good either, because many have poor success rates, and some are understaffed or have poor counselors. Not all of these agencies work with creditors. It is best if you check with the Better Business Bureau to see whether the organization you are considering is worth looking into. Seek out reviews, and avoid the ones who are being very aggressive through junk email and phone calls. For non-profit agencies, find one accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. Find out about fees and success rates, and speak to counselors and find a good fit. The rule of thumb is that any firm not comfortable with 100% transparency is one you shouldn’t work with.
Having done everything right, you must also think about the future. Come up with a solid plan to repay the consolidated debt, one that is watertight so that it stays mostly intact even if you fall into any unforeseen circumstances. Blindly paying off consolidated debt is not the right option at all. You might also fall back into the same patterns of spending if you don’t have checks and balances in place. Sit down with your friends or family or a professional counselor if needed and chalk out an extensive budget and action plan. Facing the issues proactively is the only way to get out of debt.