It Does Not Always Make Sense To Consolidate Debt – Here is Why
There is a myth out there that once you consolidate debt, you are improving your finances. This is not always the case, even if you are consolidating courtesy of the low-interest rate offers that come with your latest credit statement.
Be Wary of Low Rate Offers
In reality, if you consolidate debt with low-rate offers the expectation is that you will continue to carry a balance long after the special rate period has passed. The creditors know this because they invested a lot of money into analyzing such information statistically. If you decide to consolidate debt this way, make sure 100% of the balance is repaid before the expiry date as many of these creditors make note in their fine print that they charge extra fees or the full interest at the regular rate.
Can Debt Consolidation Help Me?
When most people decide to consolidate debt, they are usually led to their decision thanks to late payments on existing credit, a new inability to repay the original debt, or both. This means their problems will have already shown up on their credit bureau as a lower score or it will show up when the lender calculates whether the applicants can service the new debt. Either way, when people look to consolidate debt, the new loan (if approved) will typically come at a higher rate than a conventional loan and will often have a higher monthly payment as well.
What Is The Next Step?
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
Where your income level simply does not meet your debt obligations, it makes no sense to consolidate debt. Doing so simply allows you to dig yourself deeper into debt. Of course, short-term employment loss or reduced income is not the same as true insolvency since you can expect to return to former income levels. In the case where your solvency issue is permanent or long-term, consider seeking the advice of a credit counsellor who provide appropriate guidance by investigating your case in detail.
Where Do I Start?
You should evaluate the severity of your situation. This means getting a copy of your latest credit report and determining whether your situation is reflecting in your score. Also, you can learn more about debt management to see if a repayment plan makes sense. If you still think that you need to consolidate debt, remember that not all solutions are created equally. The odds are in the creditor’s court when it comes to low-rate specials, and if you decide on a consolidation loan, understand that you probably are not improving your finances after all.
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