Debt consolidation has an almost magical ring to it. The idea that someone could take all your debt – all these things that are weighing on your mind – wrap them up into neat little bundle, and charge you one low payment per month sounds almost like a fantasy. The sad truth is that, in many cases, it is nothing more than a fantasy. There is no such thing as financial alchemy and, you can bet, that you will pay for the illusion.
Advertisements touting that “you can save up to 50% or more off your monthly payments” or “debt relief is a click away” sound great until you read the fine print. However, tens of thousands of people make the mistake of falling for them every day. If you are thinking of consolidating your debt, here are three mistakes you should take care to avoid:
HARD-MONEY LOANS
One of the biggest myths about debt consolidation loans is that they are easy to get. However, if you are considering debt consolidation, your credit is likely in disrepair. As such, your only options may be creditors offering hard-money loans. The problem is that while the loan is certainly easy to get and your monthly payments are rock-bottom low, you are locked into an interest rate of 20 percent or more and payments for the next several years. In the end, you end up paying several times the amount of the loan.
DEBT CONSOLIDATION COMPANIES
Another fallacy is that of the debt consolidation company. They promise to negotiate a lower interest rate on your debt, reduce your monthly payments, etc. “all for one low, easy payment.” The reality could not be more different. This type of company builds in a fee as part of your monthly payment, typically as high as ten percent. They also may neglect to make a payment to your creditors on the assumption that an overdue account is more likely to inspire the creditor to consider adjusting the terms. In the end, you end up paying for someone to do what you can do on your own. While there are some legitimate debt consolidation companies out there, they are few and far between. Instead, try using an online debt consolidation calculator. Many are free, and they can help you see the difference paying a little extra each month on your debts can make.
BALANCE TRANSFERS
The third mistake you should avoid when consolidating your debt is balance transfers. Transferring your debt to a low-interest or zero-interest credit card can seem like a great idea, and it can be if you have the discipline to pay the card off before the low introductory rate expires. The problem is that eventually the low interest rate expires, and you are left with a high-interest rate, and usually more debt than you started with, so, you open a new card to take advantage of that card’s introductory rate. However, transferring balances frequently is a red flag on a credit report, and it can lower your score drastically. As such, you end up transferring balances so much that you get to a point where you cannot get another credit card, cannot get a low rate, or cannot get a spending limit high enough to continue your balance transfer cycle. The best idea is to never start. Only take a balance transfer if you can pay off the sum in full during the low-rate period.