Does It Make Sense to Consolidate Debt?

Contrary to popular belief, when you consolidate debt you are not always fixing your finances. In some cases, even if you consolidate using low- or zero-interest checks that come with your credit statement, you are putting yourself at a greater disadvantage.

Be Cautious When it Comes to Low-Rate Offers

In fact, when you take advantage of those low-rate offers to consolidate debt, the statistical expectation is that you will continue to carry a balance long after the special rate period expires. When you consolidate debt using these offers, you must always repay the full balance prior to the expiry date. Some creditors will charge-back the full interest for the period even if you pay 99% of the balance – go ahead, read the fine print!

Will Debt Consolidation Help

Unfortunately, people who want to consolidate debt usually need to do so for reasons that are already showing up on their credit report. They might have late payments or an inability to continue making regular payments. This results in a lower score and/or an inability to service new debt. In other words, to get a loan to consolidate debt will come with a higher rate and, potentially, higher payments.

So Now What?

In the event that you are still solvent, meaning you earn more than you must repay, chances are quite high that you can dig yourself out of the debt and possibly poor credit you have built. In other words, rather than consolidate debt, you should develop a debt repayment plan that will eliminate the debt as well as improve your credit at the same time.

And If I’m Not Solvent

In those cases where monthly income cannot meet the bare minimum in debt, housing, and living expenses, you do not need to consolidate debt. Rather, you need to seek the advice of a State-qualified credit counsellor who will make recommendations and work on your behalf after reviewing your financial circumstances completely. Of course, this does not apply to people who are experiencing temporary reductions in income, such as layoffs, vacation, etc., where normal income levels are known to return.

Where Do I Start?

Start by evaluating the situation. Obtain a copy of your credit report to see just how “bad” things are. You can also make some calculations or invest in a personal finance book. If you are still looking to consolidate debt, remember that not all solutions are created equally. The odds are against you if you use low-rate offers and if you are looking for a loan to consolidate debt, understand that you will probably not be getting yourself farther ahead financially.