It is not uncommon anymore for people to be up to their eyes in debt. It is almost something that has become socially accepted just because there are millions of Americans who do not know how to manage their money. For most of those people, the phrase “personal debt consolidation” can be like angels singing in their ears. But, is debt consolidation really what's cracked up to be?
For most people, if you were really able to cut all their payments in half and then put all of their debt into one place, they still wouldn't be able to afford to make the payment. This is not uncommon because people think that since they are paying this amount of debt off in one lump sum, then they can afford to rack of the credit cards again or live the expensive lifestyle they have already been living and got them into trouble in the first place. So when they hear phrases such as “personal debt consolidation is just a click away!” they can't help but be sucked in.
There are three moves that will get you into trouble when you get into the personal debt consolidation world.
The first bad move is the hard-money loan. This is when you find yourself with a loan that pays off your debt but only puts you in debt with somebody else. Besides, if you need a loan it's because you've probably already been late on your monthly payments on another loan, credit cards or rent - so how are you going to make payments on this loan? If you do take out a loan, expect to pay interest rates in the area of 21 to 22%. Your loan payment might be lower, but you are going to spend twice the amount of the loan in interest.
The second bad move is going to a personal debt consolidation company that promises to take care of all your debt. Sure this sounds absolutely wonderful if you're $10,000 in debt, but behind the scenes what is really going to happen to your credit and how much are you really paying? The scam here is that the debt consolidation company builds in their fee into our monthly payment and it comes out to about 10% of the payment. They will pass along your payments or they will debit the payment from your checking account and then they get back 10% on what you paid. Why pay someone else what you can do on your own? You will pay your debt off quicker by simply making higher monthly payments - and making those payments on a consistent basis.
The third bad move is transferring balances from one credit card to another. This is not as bad because there are several offers by credit card companies that have periods of time where you can transfer balances with no interest for six months for example. If you are unable to get that debt paid off, however, you will have to switch cards again. By the time you are done moving your balances all around ten different credit cards, you might just end up back on the card with the high interest rates. If your debt is not that high, you are better off just making large payments and paying the amount off. Once you have your cards paid off, request that the credit company mark your account as “closed at customer's request.” This will make your credit report look a lot better.