Debt and credit card consolidation is a booming industry that promises relief to those who are struggling. There are many ways to consolidate debt, and you shouldn’t jump in until you understand the benefits and risks.
Having massive credit card debt can make you miserable. When facing considerable amounts of debt, debt consolidation can appear like a quick fix. However, be careful, since it could make your situation much worst.
1. Debt consolidation doesn’t focus on why/how the debt got there.
Habits drive most things in life. If the debt accumulated from overspending, you are better to think about why that happened first. Thinking about what you spent the money on and why is much more critical than the balances. If we can be honest with ourselves and dig deep, this could be the last time we find ourselves in this hole.
2. It could lead to more debt.
I’ve consolidated my credit card debt multiple times. One time it was with a debt consolidation company that offered me lower interest rates — another time I got a personal loan. However, in all of the cases, I ended up going into deeper debt. That was because opening a new card/loan freed up my available credit limit and my spending habits didn’t change. In other words, I would have been better if I didn’t consolidate my debt at all. That is why it is vital to consider if combining your debt will create more problems. Especially if you can get debt free within 1-2 years, the possible interest rate savings might not be worth it.
3. There are many scammers out there.
This industry attracts scammers by the boatload, who prey on people who are vulnerable. It is essential you read the fine print, research the company and know what you are getting into before giving them any information. There are legitimate companies out there, but you need to be careful. Take a look at the latest FTC report that lists debt collection as the top category for complaints.
4. Consolidating debt in a HELOC is an option, but be careful.
If you can get a HELOC, which is a secured loan with your house as collateral, this could give you a low-interest rate. However, if there is any chance you could lose your job or could be facing a financial catastrophe, you could end up losing your house. Also, if you transfer to a lower interest account, is that going to demotivate you from paying it off? Tread carefully.
5. Avoid debt settlement companies.
Debt settlement companies are even riskier then consolidation, with how many scammers are out there. Most of them will have you stop paying your credit cards so they can attempt to negotiate a lower amount to settle balances. That sounds too good to be true because it is. Your credit score will take a beating, and there is no guarantee they will be able to settle. Moreover, you will usually have to pay high fees for their service. If you are in a horrible spot and don’t see how you can get out from under it, you might want to explore this option. However, at that point filing bankruptcy might be a solid option.
6. Your credit score could take a hit.
Even if you don’t go with a debt settlement or consolidation company, opening new credit cards and loans can have a negative impact on your credit score. A damaged credit score could be a major deal if you might want to get a car loan or buy a house soon.
7. It could extend how long you carry the debt.
If you have decent credit, you have the option in guaranteeing you stay in debt your whole life by transferring balances repeatedly. However, if the debt was painful enough to consider consolidating in the first place, is this a good option? I think the focus should not be how long can I carry the debt and pay the least amount of interest. Instead, it should be how fast can I get these balances off my back!
Is debt consolidation worth it?
I’m not trying to make you feel guilty for consolidating your debt. Because for some people, debt consolidation might be a good option. However, unless you are in a massive debt hole, or if you are struggling to pay your bills, you may want to use your motivation for wanting to consolidate to knock it out as fast as possible. If you do decide to consolidate your debt, make sure you do the following:
- Consider all your options: credit card transfers, secured/unsecured loans and debt consolidation companies.
- Avoid debt settlement companies.
- If you go with a debt consolidation company, make sure they are legitimate.
- Iron out a budget and spending plan before you sign up. If you have a partner, make sure they are on the same page.
- Think about how and why you got into debt. If the debt was from overspending, did it make you happy? How can you avoid this in the future?
- Just remember that consolidating debt might be helpful in some cases. Whether you go that route or not, figuring out how you can cut spending with a budget and produce more income needs to be a part of the plan.
Have you used debt consolidation before? Was it helpful for you?
Chris Roane is a financial blogger who loves to be transparent about money-related issues. He’s paid off massive amounts of credit card debt and is the blog author of Money Stir. His main focus on Money Stir is talking about how money relates to our relationships, personal development, and how to plan for the future we want. He’s been quoted on Market Watch, The Ladders, and other publications.