Consolidated Debt Obligations

Anyone drowning in debt may be tempted by the dozens of consolidation offers they see each day through email, television, radio, web and print advertisements. Although debt consolidation may ease the problem of keeping track of multiple monthly payments, it's important to understand that your obligations to those debts do not change. In fact, your financial obligations become even greater when you add another debt to the mix in the form of a consolidation loan.

Debt Consolidation

Debt consolidation simply gathers up your existing debt under one loan with one interest rate, which means that you make one payment each month. It does not mean that any of your debt goes away; therefore, you are obligated to continue making payments on your debt. You may save money using a consolidated loan if the interest rate is lower than your individual loans, which could mean that your monthly payment would be lower than what you were paying.

Commitment

Before taking on a consolidation loan, you must evaluate whether you are completely committed to paying off the loan. According to credit union manager Chris Viale, over 70 percent of those who utilize consolidation loans end up with the same or more debt within just two years. It's vital to take stock of your current debt and look carefully at whether a consolidation loan is actually going to save you money. Oftentimes, the interest rate consumers qualify for will not make a significant difference with regard to saving on the overall debt. If you do decide to take on a consolidation loan, you must understand that you're fighting debt with more debt, which means that you must be careful not to contribute to the debt wiped out with the consolidation loan.

Credit

Your credit score is largely determined by two factors: the timeliness of your payments valued at 35 percent and your debt utilization ratio which is weighted at 30 percent. The debt utilization ratio compares the amount of debt you have with the amount of credit available to you. When you take on a consolidation loan, the amount of credit available to you rises, which means that your debt utilization ratio actually improves. However, if you unwisely continue to spend on your

newly freed credit and you do not pay down the consolidation loan, you may quickly sink your credit score. Keep in mind that lenders may view irresponsible handling of a debt consolidation loan as financial negligence making it difficult for you to obtain new credit in the future.

Considerations

Anyone considering a debt consolidation loan should consider utilizing the services of a reputable non-profit credit counseling organization. The National Foundation for Credit Counseling website contains listings to local credit counseling organizations in every state. A credit counselor will help you to create a budget, get to the root of your spending problems and determine whether consolidation is worth the risk.