Four Mistakes to Avoid During Debt Consolidation

Many American families are being financially destroyed by debt. With the recent economic slumps and increases in interest rates, many people saw what they’d thought was manageable debt become a mountain that loomed over their future. Debt consolidation offers hope for people in this situation.

Debt consolidation has certain pitfalls, just like every other financial decision. The following are four of the most common mistakes that people make when going through this process.

Paying More to Consolidate

Many people assume that they will automatically save money in debt consolidation. This is not always the case. While the monthly payments may be lower, they often come with higher interest rates. Even if the interest rates are lower, paying over a longer period of time leads to more interest paid over time. Use an online debt consolidation calculator to see whether you will save money in debt consolidation or end up paying more.

Another way you could end up paying more is by using an inexperience debt consolidation company. Acting too quickly and failing to investigate a company’s claims can result in you paying far more to consolidate your debt than you should. Additionally, this course of action often results in constant harassment from bill collectors, adding even more stress to the debt consolidation process.

Not Dissolving Credit Accounts

If you decide to go forward with consolidating your debt, you would do well to be fully committed. An expert from Faber Inc says it’s much harder to break out of debt when you have credit cards and accounts in use. Immediately after these accounts are paid off, they should be closed. Failing to do this could lead to ending up deeper in debt than when you started. The best way to avoid the temptation to fall back on credit is to remove it completely—this may result in some serious restructuring of your budget, but will be the best move in the long run. 

Using Your Home or Other Major Assets as Collateral

Many people use a home equity loan or refinancing to consolidate their debt. It's easy to see why this sounds attractive. Mortgage rates are relatively low, often far lower than credit card interest rates. However, you are putting your home on the line for an amount of debt that is usually nowhere near its value. If you ever cannot make the payments, you risk losing your home over a relatively small amount of debt. For most people, this is much too risky to attempt if there is any chance that payments may not be met on time. 

Keeping the Same Lifestyle

Debt is often a symptom of a much larger problem. If you routinely rely on credit, you are not living within your means. Examining your average monthly expenditures and using this to create a budget plan is a great way to get started on cutting back. Make changes to your spending and your expenses to avoid acquiring new debt while you struggle to pay off the old. Maintaining these new spending habits will also result in long-term savings and a much healthier financial future. Many people who find themselves deep in debt worry about repeating the cycle for years to come—by forming healthy financial habits now, you can avoid a future in debt.

Debt consolidation can help people to dig themselves out of a hole. Because of this, many people don't pay attention to potential drawbacks of the process. Educate yourself before beginning this process to avoid these common mistakes, and debt consolidation can help put you on the path to a healthy financial future.