08
Nov

Debt Consolidation

Your phone rings. A number appears on your screen.

It’s not a number you have saved in your contacts, but it’s a number you recognize all the same, because it’s one that has called you the last three days in a row. Just the sight of those familiar digits sends your stomach sinking like a stone.

It’s a creditor calling about an overdue bill.

You’re three days late paying the minimum monthly balance on one of your credit cards. You’ve been waiting until you get paid at the end of the week, because your last paycheck went to your mortgage. But you can only pay the minimum balance because you’ve got another credit card bill — not to mention your student loan payment — due within the next several weeks.

Sound familiar?

You’re not alone. It’s the perpetual cycle of debt in which many Americans find themselves.

According to the Federal Reserve, credit card debt in America has surpassed $1 trillion — higher than it’s ever been before. And more than 44 million Americans are currently dealing with over $1.4 trillion in student loan debt.

When you’re up to your ears in overdue bills, you may be looking for any way to dig yourself out. That’s when a solution like debt consolidation might sound appealing. After all, you’d be wrapping all your outstanding debt into one single account — and trading in all of your bills for just one monthly payment in the process, right?

The truth is, it’s not that simple — and there are some downsides to debt consolidation that most people don’t realize. In many cases, you’re better off finding another solution to managing your debt (don’t worry, we’ll get to that too).

But first, here’s a quick breakdown of the drawbacks of debt consolidation.

  1. You may be trading a lower APR for balance transfer fees

If you’re given the option to transfer all of your debt onto a single, new card with a zero-percent APR, beware! The interest rate might sound enticing, but it’s almost certainly too good to be true.

Balance transfers usually come with staggering fees — sometimes as high as 10 percent of your total balance. Depending on the current balance of your debt and how many accounts you’re trying to consolidate, that amount can really add up — to the point where you may find yourself wishing you’d just dealt with a higher APR in the first place.

You also need an excellent credit score to qualify for a balance transfer.

  1. You may not be lowering your interest rate at all

For many Americans, annual interest rates render it difficult to make any sort of dent in their debt. In some cases, if you’re only able to pay your monthly minimum, the entire amount could be going towards your interest payment without touching your debt at all.

That’s why acquiring a lower interest rate is one of the biggest appeals of consolidating debt.

But the truth is, it doesn’t always work out that way. Depending on your credit score, you may not be able to secure a lower interest rate. Oftentimes, debt consolidation companies will take the average of all your interest rates and then round up for your new rate.

  1. Let’s not forget, debt consolidation firms want to get paid, too

Debt consolidation companies make money by — you guessed it — working with your creditors to consolidate your debt. And they want to get paid for this service. This comes from charging you a fee — sometimes as high as 15 percent of your entire balance.

Let’s say you’re consolidating $10,000 worth of debt. That’s up to another $1,500 you’re adding onto your outstanding balance. Ouch.

  1. You’re in debt for longer… and paying more in the long run

One of the most enticing aspects of consolidating your debt is lowering your overall monthly payment. But this is a double-edged sword. After all, consolidating your debt doesn’t mean your debt lessens. So the only real way to secure these lower monthly payments is to extend the payment period, sometimes substantially. And when you do this, you’re probably paying more long-term in interest rates and other fees.

For instance, let’s say before consolidating your debt, your monthly payments totaled $700, to be paid over the course of two years. That’s $16,800. Your debt-consolidation plan lowered your monthly payments to $300, but the payment period was extended to six years. That’s $21,600, or $4,800 extra you’re paying in the long run.

  1. There are risks to every method of debt consolidation

There’s no one way to consolidate debt, but every method carries with it some considerable risk. For instance, if you’re consolidating student loan debt, you may be at risk of losing out on the advantages of government-backed programs, such as deferment or loan forgiveness. Or if you’re consolidating debt through a secured loan, you may be risking your car or your house if you are unable to keep up with the payments.

Other options for tackling debt

So, if debt consolidation isn’t the answer, you may be wondering what other options you have when it comes to paying your debt down. Working directly with each of your creditors individually is one approach to consider. Creditors may be happy to work with you if it means they can avoid writing off the debt as a loss. Just make sure to take lots of notes and get anything in writing regarding a settlement or payment plan that you reach.

You could also work with a bankruptcy attorney to help you negotiate with your creditors. These attorneys are more likely to charge you a flat fee, rather than a percentage of your balance like debt-consolidation companies.

But overall, the key to managing your debt is to change your relationship with money. This often means adjusting your spending habits and creating (and sticking to) a budget that works for you. To learn more about how to manage your debt, repair your credit, and pave the way to your financial goals, contact a credit repair company.

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