One of the strategies that consumers employ to help them pay off debt is consolidation. Debt consolidation puts your debts together in one place, making it a little easier for you to pay them down. For some, this works remarkably well. Unfortunately, debt consolidation ends up being more problematic than helpful for most debtors.
How Debt Consolidation Works
There are two main methods of debt consolidation. One of them involves getting a third party to lump your debts together. You make one payment to the third party, and then that’s divvied up between your creditors. Often, there’s a fee charged as part of this service. You also have to be on the alert for scams.
Another method of debt consolidation is to pay off smaller loans with one larger loan. If you can qualify for a personal loan, have 0% credit card offers, or can get a home equity loan, this consolidation option would work for you.
Once your loans are consolidated into one place, you make one payment. It’s often easier to manage, and in some cases it can save you in interest, since you aren’t paying a wide variety of high rates. For the disciplined consumer, debt consolidation can work well.
Drawbacks to Debt Consolidation
While debt consolidation can be an attractive choice, it also has its pitfalls. The biggest pitfalls come with the types that involve using debt consolidation loans or balance transfers. You might transfer a balance to a 0% credit card, but what happens with the old card now that it is “freed up”?
This is an issue with home equity loans and personal loans, as well. You pay off your other debts, and all of a sudden it seems as though you have all sorts of available funds. It’s easy to rack up more debt on the free cards, even before you’ve finished paying off your other consolidated debt. Pretty soon, you’re in worse shape than you were before.
Fixing the Problem, Rather than Focusing on the Symptom
No matter your age, paying off consumer debt is a good financial move to make. However, you need to be careful about how you approach the problem. Simply consolidating your debt, without making changes to the way you manage money, won’t fix the issue. You have to look at the underlying problem, which is that you might not be living within your means.
Be honest about your finances and how you manage your money. As long as you spend more than you earn, no amount of debt consolidation is going to help. You have to first stop digging the debt hole. Then, once you have your money management under control, you can make a debt reduction plan. Debt consolidation may or may not be part of this plan, depending on your situation.
The key to staying out of debt is reforming your financial habits so that you no longer rely on debt to fund your everyday purchases. Debt consolidation can help in some cases, and it has proved effective for many consumers. But it will only work if you’re really ready to improve your finances, and disciplined enough to avoid more debt.
Have you tried debt consolidation? How has it worked for you?