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Tags: finance, debt consolidation, debt consolidation may be bad for you
 Credit cards have become an extension of ourselves. We use it to take care of almost any financial transaction. And should we max out one card, we simply get one more. Most of us carry more than one card. In fact most of us probably have three or more cards.
Thus, it is not surprising to find out that a majority of people owe a lot, usually through their credit cards. Some take care of it by frugal financial living, but most grab a debt consolidation loan in order to consolidate debt. The reason for that is most of us believe that in order to consolidate credit card balances the best solution is to get debt consolidation loans.
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And why not? Instead of paying off many bills you only need to take care of one. However, such a tactic does have limitations and loans for debt consolidation may be bad for you. The thing is the process does not really take care of the main reason people wind up owing a lot of money—over spending.
Yes, when you do debt consolidation you get to pay off your other bills and only get one in return however, it does not prevent you from using the newly freed cards for other transactions. In reality, it does not only free you from multiple bills, but it also frees you to spend again and again.
At the same time, because of hidden fees and insurance requirements you may not really be paying less paying one bill than you would have paying multiple bills. Typically, when doing debt consolidation you take out either a home equity loan or a personal loan. If you take a personal loan and you have bad credit, you may wind up paying for an 18% to 21% interest rate.
And it doesn’t stop there. If you use the loan to pay off what you owe faster then that's well and good. Unfortunately, most people look for lower monthly payments when they borrow so the term gets extended and it takes them longer to pay off the loan which of course means the total amount gets increased.
And like I pointed out earlier, while they are doing debt consolidation on their old balances, they are still adding new ones. If you do equity loans you have a couple of options available for you. You can refinance you current mortgage to get a higher one or simply get another mortgage.
You also get the line of credit option where you only pay for what you withdraw out. At the same time the interest that you pay can be tax deductible. However, because of the tightening economy many lenders have also tightened their application requirements. Other than loans, you can also do debt consolidation by transferring balances from high interest cards to those cards that offer zero percent interest.
However, these rates are usually introductory and typically last for only 6 months after which you pay the higher interest rate which can sometimes be higher than what you have right now. And the high rate can be triggered by something as simple as being late on a monthly payment.
When doing debt consolidation it may actually hurt your FICO scores. The process of applying for the loan and closing your old credit card accounts may result in the lowering of your credit score which may not be outweighed by the benefits. You can actually take care of your balances without having to go through the whole process.
It can be as easy as simply asking your credit card providers to give you a lower interest rate. And if you pay off more than the minimum monthly payment you can lower your balances faster as well. But if you’re still going ahead with debt consolidation stop extra spending and shop around.
This way you get out of hole faster and not add to it.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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