The average American household has more than $15,000 in credit card debt. Coupled with credit card interest rates being more than 15 percent on average, it can be tough for consumers to dig their way out of debt. Many are trying to find ways to consolidate their debt in order to make it more manageable and eliminate it faster. While debt consolidation strategies—such as taking out a personal loan, transferring the debt to a zero percent APR credit card, or taking out a home equity line of credit—can be a great tool for eliminating debt, there are downsides to this, too.
If you're thinking about consolidating your debt, read on to make sure you don't make any of these common mistakes.
5 Common Debt Consolidation Mistakes
Mistake #1: You don't take care of the actual problem
While consolidating your debt will help you manage it better and save you money in interest, it won't prevent you from overspending, which is most likely what got you into debt in the first place. In order for debt consolidation to work, you have to get to the root of the problem. Consider cutting up your credit cards or keeping them out of your wallet. Or, pick up a side hustle or second job to help pay for your extra expenses. Changing your habits is crucial for getting out of debt.
Mistake #2: You don't know your options
There are numerous debt consolidation scams out there. If a company is charging outrageously high fees or wants to take funds directly out of your bank account, run fast. True debt consolidation consits of four different options. You can take out a personal loan with a fixed interest rate and pay off your debts with that loan, you can open a zero percent APR credit card and transfer your debt to the new card to save on interest, you can take out a home equity line of credit on your home to pay down your debts, or you can work with a trusted company to negotiate your debts with your creditors.
Mistake #3: You don't shop around
Just like you would shop around for a camera or shop around for a mortgage, you also need to shop around for the best debt consolidation company. Different lenders will offer different rates and different terms, so do your research before signing on the dotted line.
Mistake #4: You don't change your lifestyle
After you consolidated your debt, you have to ask yourself what got you there in the first place. If it was an emergency, perhaps you need to work at building a solid emergency fund in case something were to happen again. If you can't afford your current bills, perhaps it's time to downsize your home, stop eating out or cut cable. If you simply just spent too much money, reassess how you're spending your free time. Go on a hike instead of browsing the mall, read a book instead of shopping online, or go through items you already own before purchasing something new.
Mistake #5: You don't know which debts to consolidate
You can consolidate credit card debt, student loan debt and other types of consumer debt, but that doesn't mean you should consolidate everything. Look at all of your individual debts and write down the interest rate. Debts with high interest rates (such as credit cards) will want to be consolidated. However, you might not want to consolidate your student loans if the interest rate is better than the new one you would receive. With student loans, sometimes refinancing is the way to go to lower your payment and help you save money on interest.
When in doubt, speak with a debt consolidation expert and do as much research as possible before making a decision. If used correctly, debt consolidation can be a wonderful way to help get your finances back on track.