When it comes to managing debt, consolidation seems like a step in the right direction. But it turns out, combining all your debts into one monthly bill doesn’t help you pay them off faster, and even worse, could hurt your credit in the long run.
Debt Consolidation Explained
When you’re struggling to make ends meet every month, juggling different loan payment due dates and amounts can feel overwhelming. One of the biggest draws to debt consolidation is combining all your unsecured debts, like credit cards, medical bills and payday loans into one monthly payment.
Put simply, debt consolidation is a refinanced loan with extended repayment terms. While your payments may be lower, your loan is also prolonged, meaning it will take you longer to pay the debt off and you’ll likely pay more in interest over time.
The Drawbacks
Many people are drawn to debt consolidation as a way to lower interest rates and simplify debt relief, but those claims are misleading. Though a company may offer you a lower interest rate at first, there’s no guarantee that rate will remain low. Consolidating your debt also means staying in debt longer, so even with a lower interest rate, you’ll end up paying more over time because the terms of your debt agreement have been extended.
What’s more, consolidating your debt without also changing your spending habits can harm your credit score, particularly if you make late payments or continue charging your credit card after you pay off your balances.
Debt consolidation companies are also notorious for misleading consumers, and promising more than they can deliver. In fact, dishonest debt consolidation companies rank as one of the top consumer complaints received by the Federal Trade Commission.
What To Do Instead
Ultimately, getting out of debt requires a change in behavior. While debt consolidation could be a viable option for those who struggle to make multiple payments at once, it can do more harm than good if you aren’t simultaneously changing your spending habits.
There is no quick fix to getting out of debt. At the end of the day, consolidation rearranges your debt, but only you have the power to eliminate it. Living with debt can be difficult and stressful, but developing an aggressive plan to pay it off and putting that plan into action will do more to secure your financial future than looking for a shortcut.
~Here’s To Your Success!
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