When bills pile up and collectors come calling, consolidating debt into a single monthly payment can be appealing. It lowers the chances of forgetting to pay a bill and can make managing personal finances much easier.
Debt consolidation can be a good idea for consumers who are committed to paying down debt and are reading to make significant changes in how they handle money. For others, it can be a dangerous tool that leads to more debt.
Here are eight situations where debt consolidation would not be a good option:
Your House Would Be Collateral
Consolidating debts into a home equity loan has become extremely popular because interest rates on these loans are almost always much lower than rates on credit cards.
This could work if you are certain you can make the new monthly payment. Otherwise, missing payments on a loan secured by your house could result in foreclosure. Before you roll your debts into a mortgage, evaluate your finances and make sure that even in difficult months you will have enough money for the payment.
It Doesn't Motivate You to Stop Unwise Spending
Debt consolidation will only benefit you if you change your spending habits. Otherwise, you will continue to build debt on top of your newly consolidated loan. Safeguard yourself by creating a budget and sticking to it.
You're Worried About Your Credit Score
If your credit score already is low or is on the brink of being low, debt consolidation will only make it worse. The age of accounts factor positively into the calculation of a credit score, and debt consolidation will erase those accounts and create one new one that would decrease your score.
The Long-term Numbers Don't Make Sense
While your monthly payment may be significantly lowered with a consolidated debt, it could be the result of your payment being extended over a longer period. When you calculate the interest you'll pay on a consolidated debt, you'll likely find that you'll end up paying much more.
You Haven't Talked to Your Individual Creditors
Sometimes creditors will agree to reduce your monthly payment or change your payment due date if you ask. With this strategy, you could reduce your monthly debt payments enough yourself and avoid risky debt consolidation.
You'll Save Money by Paying Off the Consolidated Debt More Quickly
Don't sign a debt consolidation agreement without first looking at its long-term financial effects. An introductory interest rate may expire, leaving you with a higher monthly payment and overall cost down the road.
The Debt Consolidation Service Seems Costly
Consolidation services can tack on significant fees, whether it's one up-front fee or a monthly charge when they handle your payments. If you find this to be the case, check into other options first for reducing your debt payments.
You Haven't Talked with a Financial Adviser
An expert can help you decide if consolidation is the best route for paying off your debts. If you already are struggling with debt, seek out a financial adviser or credit counseling service to guide you as you make the best decisions about paying off debt.
For disciplined and determined consumers, debt consolidation can be a beneficial tool for getting out of debt. For those who may still struggle with spending issues or job uncertainty, pursuing other financial strategies first could reduce the chances of further increasing personal debt.