Debt Consolidation: Is It Right For You?

Debt consolidation onto one credit card may seem to make it easier to pay off all you owe, but there may be hidden traps.

If you’ve been considering debt consolidation because you’ve maxed out your credit, I suggest you rethink the possibility. It’s not the cure-all so many of us think it is… despite what all those slick ads might suggest.

Because here’s the thing: if your bad credit habits caused your problems in the first place, you’ll probably rack up even more debt at just as high an interest rate–or worse–if you don’t address the root problem at its source.

In other words, stop spending so much.

Fighting Fire With Fire

The above approach works well when you’re dealing with real-life flame, because it deprives a fire of the fuel it needs to survive. But this doesn’t always work with credit issues, since there’s always more credit available…if you’re willing to take bigger chances and pay higher interest rates or fees.

Let’s suppose you have some big student loans and, as an inexperienced consumer, you overbalance yourself with big revolving credit card balances, a nice, juicy mortgage, and other debt. Suddenly, potential bankruptcy looms. What do you do?

Equity Errors

One way to get out from under is to leverage your home equity, assuming you have some, or even obtain a second mortgage or line of credit. But even if you use the cash to pay off all your other bills, you’re still in danger, Will Robinson — especially if you fail to control your spending thereafter.

Some people say that risking that is worth the tax break, to which I say, “Pshaw!” The tax break’s not that good, really, and your deductions may be limited. Is it worth losing your home if some catastrophic event leaves you ill or out of work, and you default on the loan?

Didn’t think so.

Other Options

Traditional debt consolidation loans seem helpful because they cluster all your bills into one single payment; so instead of paying 10 or 15 different bills, you pay one. Great, eh?

Sure, assuming a) you really do end up paying less than all those bills altogether, which you may not if the interest rate is high (which it will be if you’ve already got credit issues); and b) You don’t go right out and start building up new credit accounts elsewhere. If you really can control yourself, hey, go for it.

As for those infamous zero-percent credit card transfers, don’t even get me started. Not only is it a pain in the tuchus to do it and keep doing it, over and over, those “zero percent” deals are temporary, and will soon leap skyward. And woe betide you if you make a late payment.

If there’s a worse debt consolidation possibility out there, I don’t know what it is.