The Truth About Debt Consolidation

When you have a lot of debt, it can feel consuming and even scary; because of this, consumers will sometimes make rash financial decisions in order to get out from under their creditors. Doing this can take a bad financial situation and make it much worse.

Struggling to make your debt repayments isn’t fun. Debtors in an unhealthy financial situation will often find themselves making minimum payments for extended periods of time, but not seeing a dent being made in their overall balances. Depending on how high your debt amounts are and how many accounts you have, simply meeting your minimum payments can become overwhelming.

For debtors finding themselves in these situations, looking for ways to settle accounts will usually become a priority; this is when using a debt settlement company might come into play. But, is consolidating your debt the right decision for your financial situation? Here, we’ll take a look at the truth about debt consolidation and get you the facts to make the right decision for your unique financial situation.

What IS Debt Consolidation?

When you have several loans that are unsecured (such as medical, student, or credit card debt) companies that deal in consolidation will offer you the opportunity to consolidate your debt together with them into one monthly bill with a lower interest rate. They do this by paying off your debtors for you, and assuming your debt.

What Debt Consolidation Isn’t

While debt consolidation can sound tempting, it’s important to be realistic about what you can expect to get out of it. There are some misconceptions about what debt consolidation is and can do:

  • Consolidating your debt does not mean eliminating it. Your debt is still there, it is just brought together into one bill instead of being spread out amongst several.
  • It is commonly thought that debt consolidation will get your out of debt faster - this is inaccurate. In fact, when you consolidate your debt it means you’ll lower your minimum monthly payments and stretch your debt out over a longer period of time.
  • Debt consolidation will not improve your credit score, it will actually probably lower it. When you consolidate your debt, it means your other accounts will be closed and you will assume all debt under one maxed out credit line. You are pretty sure to see your score drop, unfortunately.
  • While most debt consolidation companies will tout lower interest rates, potentially saving you money, this is often not the case. Your offered interest rate will be based on your credit history and is often subject to change.

Possible Pitfalls of Debt Consolidation

Debt consolidation is a financial choose that carries its own risks, some would say more risk than other financial moves. Before deciding to consolidate, understanding the problems that can happen is vital:

  • Your credit score can significantly drop with the closing of your credit accounts
  • You can end up paying your debt off for longer
  • You may end up paying more on your debt with added in fees and potentially higher interest rates
  • If you don’t stop spending on credit, you can end up further in debt

In this area, you also run the risk of dealing with potentially fraudulent companies. In fact, the Federal Trade Commission (FTC) receives the most complaints about debt consolidation companies.

Other Ways to Get Out of Debt

Before considering debt consolidation, you should look into other potential opportunities for reducing and paying off your credit card debt. Some options that may help are:

  • Settling your debt. You can do this with debt settlement companies, but they will charge a fee. You can attempt to negotiate your debt down directly with your creditors as an alternative option.
  • Restructuring your budget. This isn’t the most fun option, but you’ll be happy once your debts are all paid off! Sit down and draw up a budget with your regular expenses and see where you may be able to cut corners. Doing this may free up some money for you to use in order to pay off your debt quicker.
  • Snowball or avalanche your debt. There are certain methods to pay off debt faster that you may find useful; two of these methods are the snowball method and the avalanche method. With the snowball method, you’ll pay off your smallest balance first, then take the money you saved paying off that debt and apply it to your next smallest debt, and so on. The avalanche method is similar to the snowball method, except you pay off the highest APR debt first and then apply the money you save in paying off the first account to the next highest APR, and so on.

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