Debt consolidation is consolidating various debts, such as credit card debt and personal loans, and rolling them into one, hopefully smaller, payment. In the best case, you will be paying at a lower interest rate, but you likely will be paying on the debt even longer.
It can work out well in a few cases, but makes matters worse in most cases. In an article titled, “Debt Consolidation Has Its Pitfalls,” posted Aug. 12, 2008, Jennifer Woods, writing for CNBC.com, warns there are things to consider. I know of anumber of folks who have tried credit counseling and also debt consolidation or management with some success overall.
Woods quotes certified financial planner with NEBSCO Financial Services, Arnold Graf, a, as saying debt consolidation can work out for people who have enough equity in property and are credit worthy, but “usually people that consolidate are close to bankruptcy…..” Graf said consolidating debts is buying time, and “you have to consider whether you are willing to pay less…” Woods also quotes Gail Cunningham, representing the National Foundation for Credit Counseling, as saying, “Debt consolidation is always a good idea on paper.”
Cunningham warns that you must be very disciplined or it will not work.
She’s right. Most people who take that route feel suddenly richer when all they have is one relatively small payment. Since they haven’t, in most cases, tackled the habits and thought processes that got them into debt to begin with, they simply run up more debt and are ultimately worse off than ever.
Woods also notes that using a home equity loan can also be a bad idea. She cites a certified financial planner as explaining that credit card debt is considered unsecured debt, because there is no collateral to back it.
When you roll that debt into a home equity loan, your home is now collateral; if you fail to repay that loan a lien can be placed against your home. One personal I knew in Baltimore who was on workers compensation successfully tried debt relief and consolidation. Speaking of that\, if you are in Baltimore and need a wonderful Baltimore injury attorney I can suggest this one, Mark Atas, who also does personal injury related cases overall.
The bottom line is, consolidating your debt, be it with a debt-consolidation loan, or rolling it all onto one credit card (which, Woods reports, could result in additional hidden charges) is fraught with new peril.
It may not be a bad idea to get some advice from a reputable credit counselor. If they seem more interested in teaching you something than they are in selling you a loan or other expensive services, beware.
Visit the National Foundation for Credit Counseling for pointers on where to look for help. They can help you make a plan with a budget, to pay off your debt and repair your credit. Until you know how much more powerful it feels to take charge or your money than it is to spend it, you may be doomed to repeating your same old patterns.