Debt consolidation may seem like an easy way of getting your debt under control; however, consolidation loans must be used with caution to prevent further financial anguish. While you may continue to use your credit cards while on a consolidation loan, doing so only creates more debt. Canceling your credit cards would be a mistake because it might damage your credit score -- but using them can be a mistake as well.
Debt Consolidation
When you take on a debt consolidation loan for your credit card debt, it pays off your credit card balances, and as a result you only need to make one payment per month. Aside from the convenience of making only a single monthly payment, debt consolidation loans may have lower interest rates than credit cards. However, although consolidation loans may be offered at very low interest rates through advertisements, those rates are usually only given to people with excellent credit.
Credit Card Use
When the debt consolidation loan clears your balances, your credit is actually freed up and you may use it. However, using your newly freed credit is actually one of the biggest reasons that debt consolidation fails as a method of paying off your debt. In a Bankrate article by Jenny McCune, a credit union manager named Chris Viale points out that over 70 percent of people who take on consolidation loans end up with the same or more debt within two years of accepting the loan. It is, therefore, unwise to continue using your credit cards when you've taken on a consolidation loan.
Discipline
When you take on a debt consolidation loan, you must consider whether you are truly committed to paying off your debt, or if you're just looking for a way to get more credit. Taking on a consolidation loan simply to give yourself more breathing room is like treating the symptoms of a disease rather than the root problem. If you are spending on your credit cards while utilizing a consolidation loan, you are only making the problem worse. Those who are truly committed to paying off their debt will lock up their credit cards to prevent themselves from spiraling further out of control.
Considerations
When lenders see a consolidation loan on your credit report, it demonstrates that you had difficulty making payments in the past. On top of that, if you continue to spend on your credit cards, you are further demonstrating your inability to control your finances. As a result, you may have difficulty obtaining new credit in the future. For those who cannot trust themselves to pay off their debt with a consolidation loan, asking creditors for lower interest rates may be a more effective way of getting control of debt.
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