Does It Make Sense to Consolidate Debt?
It may seem contradictory, but just because you consolidate debt, it does not mean you are fixing your finances. This is particularly true if you use those low/no-interest checks that come with other credit statements. At least for the most part, anyway.
Beware of Low-Rate Specials
In fact, when you take advantage of those low-rate offers to consolidate debt, the statistical expectation is that you will continue to carry a balance long after the special rate period expires. When you consolidate debt using these offers, you must always repay the full balance prior to the expiry date. Some creditors will charge-back the full interest for the period even if you pay 99% of the balance - go ahead, read the fine print!
Can Debt Consolidation Help Me?
Unfortunately, people who want to consolidate debt usually need to do so for reasons that are already showing up on their credit report. They might have late payments or an inability to continue making regular payments. This results in a lower score and/or an inability to service new debt. In other words, to get a loan to consolidate debt will come with a higher rate and, potentially, higher payments.
What Do I Do Now?
In cases where you are solvent (you earn more than you must repay to creditors, including landlords, insurers, etc.) you may not want to consolidate debt given what will inevitably result in higher payments and interest. Instead, consider putting a repayment plan together, one that you can stick to. The result will be a lower debt load with the bonus of gradually improving your credit score.
What If I Am Not Solvent?
Where your income level simply does not meet your debt obligations, it makes no sense to consolidate debt. Doing so simply allows you to dig yourself deeper into debt. Of course, short-term employment loss or reduced income is not the same as true insolvency since you can expect to return to former income levels. In the case where your solvency issue is permanent or long-term, consider seeking the advice of a credit counsellor who provide appropriate guidance by investigating your case in detail.
Where Do I Start?
Start by evaluating the situation. Obtain a copy of your credit report to see just how "bad" things are. You can also make some calculations or invest in a personal finance book. If you are still looking to consolidate debt, remember that not all solutions are created equally. The odds are against you if you use low-rate offers and if you are looking for a loan to consolidate debt, understand that you will probably not be getting yourself farther ahead financially.
Beware of Low-Rate Specials
In fact, when you take advantage of those low-rate offers to consolidate debt, the statistical expectation is that you will continue to carry a balance long after the special rate period expires. When you consolidate debt using these offers, you must always repay the full balance prior to the expiry date. Some creditors will charge-back the full interest for the period even if you pay 99% of the balance - go ahead, read the fine print!
Can Debt Consolidation Help Me?
Unfortunately, people who want to consolidate debt usually need to do so for reasons that are already showing up on their credit report. They might have late payments or an inability to continue making regular payments. This results in a lower score and/or an inability to service new debt. In other words, to get a loan to consolidate debt will come with a higher rate and, potentially, higher payments.
What Do I Do Now?
In cases where you are solvent (you earn more than you must repay to creditors, including landlords, insurers, etc.) you may not want to consolidate debt given what will inevitably result in higher payments and interest. Instead, consider putting a repayment plan together, one that you can stick to. The result will be a lower debt load with the bonus of gradually improving your credit score.
What If I Am Not Solvent?
Where your income level simply does not meet your debt obligations, it makes no sense to consolidate debt. Doing so simply allows you to dig yourself deeper into debt. Of course, short-term employment loss or reduced income is not the same as true insolvency since you can expect to return to former income levels. In the case where your solvency issue is permanent or long-term, consider seeking the advice of a credit counsellor who provide appropriate guidance by investigating your case in detail.
Where Do I Start?
Start by evaluating the situation. Obtain a copy of your credit report to see just how "bad" things are. You can also make some calculations or invest in a personal finance book. If you are still looking to consolidate debt, remember that not all solutions are created equally. The odds are against you if you use low-rate offers and if you are looking for a loan to consolidate debt, understand that you will probably not be getting yourself farther ahead financially.
About the Author:
Chris Blanchet has more than 16 years of experience in the financial services industry and has helped thousands of people fix their finances. He is the author of the debt management program, Help Fix My Finances. He also contributes regularly to the Debt Management site, Debt Consolidation Opinions.com.
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