It can seem like a no-brainer, the opportunity to roll all your high-interest debts -- with their various balances and due dates -- into a single loan with a fixed due date and payment. It’s called debt consolidation, and while the financial strategy has helped scores of people like you, there are factors you should first consider. If your spending isn’t controlled, for instance, the whole process would be for naught. With that said, here’s how you can go about avoiding the risks of debt consolidation.
What is Debt Consolidation?
This is the process of merging multiple debts into a single obligation. Rather than making separate monthly payments to each creditor – typically credit card issuers – you make just one payment to one lender, hopefully at a better rate. Debt consolidation can save you time and money.
Debt consolidation can be in the form of a 0%-balance transfer card, onto which you can shift your high-interest debt. The proviso is that you must be able to pay the card off before the promotional rate expires – usually between 12 and 21 months – and the rate shoots back up. You also must have a strong enough credit score to qualify for such a card.
If you don’t want to risk losing your house by using it as collateral for debt consolidation, you may want to consider a personal loan with a fixed monthly payment and low fixed interest rate or IVA Advice.
Who is a Good Candidate for Debt Consolidation?
Debt consolidation may be a good strategy for anyone who is grappling with high-interest liabilities and multiple balances. But again, one needn’t bother if what got them in this condition – excessive spending – hasn’t been reigned in.
You also may be a good debt consolidation candidate if you:
- Have established a plan to emerge from debt and stay there
- Have good or excellent credit that will qualify you for a loan with the best terms and interest rate
- Can barely keep track of all the bills coming in
- Have medical bills you wish to consolidate and need time to erase them
What Could Go Wrong with Debt Consolidation?
The main problem goes back to spending and the opportunity to pile up even more debt. If you use a loan to consolidate $25,000 in high-interest debt, for example, but you continue to use your plastic, you may end up having to not only pay off the loan, but a growing mound of new debt as well.
So, in this way, while debt consolidation offers a way to streamline your debts, you haven’t done anything about habits that could leave you in even worse shape.
The latest California debt statistics should give you pause. Residents of the Golden State owe an average of $3,300 in credit card obligations, which is higher than the national average. Further, according to Experian, while the average credit card utilization in this country last year was 25%, it was 76% among California residents seeking debt relief. Moreover, the average California household has north of $20,000 more debt than the average U.S. household. For such households, debt consolidation and debt settlement are among remedial options.
Another possible issue bears repeating. Yes, you can use your home equity to consolidate debt. Such loans usually have low interest rates since your home is used as collateral, and monthly payments are fixed. However, you’re in trouble if you can’t resist spending after all your debts are cleared (yes, it does come back to your spending). You very well could lose your home.
With a balance transfer card, if you aren’t serious about repaying your debt and fork over as much as possible, all you have is a fleeting respite from a higher interest rate. You’re back where you began once the promotional period is over.
The bottom line is that, to avoid the risks of debt consolidation, you must have a different mindset about debt and how and where you spend. Sure, you have options to improve your situation, particularly if you have good credit, but you must do whatever you can to avoid more debt. In addition, you might want to also know what are the best credit repair companies to give you tips on how to keep you away from more debt.