Debt Consolidation, a Help or a Hindrance?

Debt consolidation seems easy enough. You've got credit cards, department store credit, a car loan, maybe even a personal loan too. You are making many different payments, which are taking a big chunk of your income. On top of that, those balances seem to be going nowhere. So...

Why not put all of your debts under one umbrella and make one (lower) payment? After you read this article if you think you can make it work and would like to investigate some ideas consider a high interest credit card debt consolidation. That lower payment will free up some money each month. Sounds great. What could be wrong with that?

Well, nothing and a lot.

It all depends how you lump those debts, the type of loan or program you use to consolidate debt, and what you do with those newly zero balanced credit cards and the extra money you have freed up. You can really work hard to eliminate your debt or you could end up in serious trouble. Let's compare...

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You want to recognize it so you can avoid it. If you choose the most common route you will secure your consolidation loan with your home, usually with a second mortgage. This makes sense, since you can usually get a lower rate on the loan and the interest may be deducted off your taxes (check with your tax advisor).

But don't forget about the fees for one of these debt consolidation loans, they can add up in a hurry. And do you really want to pay for your morning coffee for the next 5 to 10 years? Also, if you can't pay do you want to lose your house?

Here is something else to worry about. You have "fresh" credit cards with zero balances. If you are not very careful and do not have a plan in place, you could end up with twice the bills you had before you used debt consolidation...

Most people are living beyond their paycheck. Most spend about 10% more than they make on a monthly basis. The only way this is possible is with credit cards. They are renting a lifestyle, not owning and paying for it. It takes only a few months of this type of behavior to max out their cards again. Then they have new balances to pay and their debt consolidation loan too. They have reached a dead end. Now..