Debt Consolidation Risks

Debt consolidation can sound like the answer to your financial problems. Consolidating debt means bringing all of your high-interest credit card accounts under one low-interest loan. It lowers your interest debt, lowers your monthly payments and helps you free up extra cash each month. But there are debt consolidation risks that you need to consider before determining if consolidation is the right solution for you.

Extra Fees

A debt consolidation program can reduce the amount of interest you are paying on your credit accounts, but it can sometimes make up for that interest in loan fees. According to MP Dunleavey at MSN Money, debt consolidation programs normally include monthly fees for administering your loan, and they can be as much as 10 percent of the monthly payment. So if your payment for the loan is $200, the debt consolidation company will add $20 to it and keep that extra fee for itself. You run the risk of going through the consolidation process only to find out that the extra fees make your monthly payments the same, or even higher, than they were before.

Credit Rating

According to Bankrate.com, being on a credit assistance program such as debt consolidation does place a note on your credit report. While it may not necessarily hurt your credit score, being on a consolidation plan can prevent you from getting new credit until you complete the consolidation program. New creditors look at a consolidation program as an indication that the consumer is maxed out on the credit she can handle, and they will not issue new credit until the accounts are paid off.

Temptation

One of the risks of debt consolidation is the temptation that exists to put yourself back into a bad credit position. According to MortgageLoan.com, if you do not cancel your credit accounts after they are paid off, then the idea of having several accounts with a zero balance can be an invitation to run up your balances again. The catch is that many credit counselors will tell you to leave some accounts open and even use them sparingly to help you rebuild your credit rating while you are paying off your consolidation loan. If you are not confident that you have the willpower necessary to hold off on spending on your accounts, then talk to a credit counselor about a possible solution.