Drawbacks of Debt Consolidation

If you have consumer debt, you are probably handling several credit cards with outstanding balances and an assortment of bills with varying due dates. It is easy to lose track of payments and further damage your credit score. Consider debt consolidation. You will deal with only one lender, your monthly payment will be lower and you will gradually improve your credit history. It sounds like the perfect solution, but there are a few drawbacks.

Higher Cost

Your monthly payments will be lower, but repayment will take longer. If you are using a consolidating service, you will pay a fee for their services. After all, they have negotiated lower payments with your creditors and arranged for you to have additional money each month. If you have too much debt or a poor credit history, the interest rates on these loans may be higher than your present rate. Investigate a number of companies and calculate the overall cost of your debt. Multiply your monthly payment by the number of payments and add the fee. If your debt can be paid in less than two years with careful budgeting, you may not need a consolidator.

Spending Temptation

Once you transfer your debts, your credit cards will be empty and available for use. If you haven't changed any of your spending habits, you will accumulate more debt and add to your stress level. Meet with a non-profit credit counselor before visiting the consolidation company. He will help you establish a reasonable budget and give advice about negotiating with your creditors. You can set up your own debt repayment plan and follow it. If you decide to get rid of some credit cards, notify the credit-card company and ask them to mark the account "closed at customer's request." Otherwise, your credit report may indicate that the creditor closed the account.

Scams

Most consolidators are honest and will help you with your debt. But, there are a few companies that will take advantage of people in desperate financial straits. Be wary of any consolidator who promises instant solutions. Do not answer any advertisements that appear in newspapers, on the radio, over the Internet or tacked to telephone poles. Ask your friends and business associates for recommendations. Check each firm's background with the Better Business Bureau. Before signing any document, carefully read and review all the terms and conditions--loan period, interest rate and special fees.