Debt consolidation seems like an easy way out when you’re neck deep with debt. The term itself evokes feelings of reassurance. So, you just merge all your existing loans into one loan and be done with it, right? Not quite. Like everything else, debt consolidation programs work better for some people as compared to others. If you’re the kind that views a ‘shopping spree’ as a reward after seeing the first signs of financial recovery, then maybe you should not go for it after all.
Debt consolidation should be viewed as the absolute last disaster management plan, after which the only option you have left is filing for bankruptcy. The credit repair and debt repair organizations are obviously there to make it sound as simple as possible. With all their infomercials and their telesales calls. They package it in a way that makes you believe that ‘debt consolidation’ is some kind of a magic pill that you take to cut your debt into zero at lightening fast speed. To the same effect, all of us have received e-mails from unknown organizations that promise something like:
"CALL US AND PUT AN END TO ALL YOUR DEBT RELATED PROBLEMS" "REDUCED DEBT, LOWER INTEREST AND REDUCED MONTHY PAYMENT, ALL JUST A CLICK AWAY" "SLASH YOUR INTEREST RATE DOWN TO ZERO!"
I know, it sounds very tempting, especially if you pre-occupied with worrying about how you will ever be able to reduce your debt to a manageable level. Here is the thing about debt consolidation – you will still be paying the same amount (or more based on how you negotiate with your debt consolidation provider) back as all your existing smaller loans, the only difference is the amount and time of repayment. So your debt will not disappear, you are just paying it off in a different way. People usually find it easier dealing with one larger payment as compared to several smaller ones. All things considered, there are some things that you can go right with during the process of debt consolidation and some things that you can go wrong with. Here are three things that you’re doing wrong:
(1)Settling for a higher interest loan. Never fall for a loan that charges you an interest rate that is higher than what you are currently paying, that’s a through and through bad deal. Sometimes providers will entice you into consolidating a loan by telling you all its benefits, all the while increasing the interest rate to as high as 20% to 22%. With such a settlement, your monthly payment maybe lower but you will end up paying more.
(2)Falling for the credit card balance transfer temptation There is an abundance of low interest balance transfer card offers these days, but remember that those rates are a 'special offer' that last only for a few months or so – after which you will be compelled to switch cards again. When this activity starts to show up on your credit report, you will begin to appear as a ‘credit risk’. Then, if you get turned down, you will end up holding the high interest credit card you were hoping to dump. If you’re still convinced that balance transfer is the way to go. Make sure you close all your other accounts and notify the credit card companies to mark the account "closed at customer's request".
(3) Selecting a 'too good to be true' debt consolidator As a rule, you are almost always better off if you can educate yourself to consolidate your debt instead taking the help of a debt consolidator. These are some of the things you need to know about debt consolidators – in most cases they build in a fee as part of the monthly payment you make to them (as much as 10%), they can make outrageous claims to make you seem at a weak spot and make their offer sound attractive (like telling you that without their services, it would take to 10-20 years longer to clear your debt) and in rare cases, debt consolidators have been found making late payments or missing a payment altogether (thereby worsening your credit record). You have to ask yourself – is it worth paying someone else for something you can do for yourself?