Reasons why debt consolidation does not usually work.
I’ll be clear to start out. Debt consolidation does not work well for the majority of people and their debt. Debt consolidation as it applies to this article does not include federal student loan debt consolidation which is generally a good move if possible for students recently out of college.
For most people the lure of using a debt consolidation company comes in the form of promises. Promises that debt collectors will stop calling, promises that your monthly payments will be lower, and promises that you’ll get out of debt.
But are these promises true?
Will the calls stop from creditors if you use a debt consolidation company. Sure from the creditors it may stop, but if you fall behind even a little bit with the company that now handles your debt payoffs, you’ll likely get a ton of calls, letters, damages to your credit score, and higher rates.
Lower monthly payments are possible. If you have a lot of credit card debt or unsecured debt and you can’t make your minimum monthly payments, debt consolidation companies claim that they’ll lower your monthly payments. They may ‘lower’ them for you, but really you are paying them to use their money to appease the credit card companies and others that you owe. As such, you are basically paying them extra money to make it seem like you are paying less a month.
Like a smoke and mirrors scheme, debt consolidation for high interest debt management simply moves around who you are paying interest to. The company will use it’s money to make your minimum monthly payments on your debt (or whatever amount they agree to that will ‘get you out of debt’). For this service, you’ll pay them a set amount from month to month some of that goes towards your debt, the rest is their profit. Often times the first payment to them is just for service fees and month after month you’ll be paying them money only of which some goes towards your actual debts.
Your monthly payments to them may be lower then your minimum monthly payment if you have a lot of unsecured debt especially on a credit card. You may be thinking ‘well my credit card payments will be less’ this way. Less money out of your pocket per month, but more money spent in the long run to get out of any debt.
Getting out of debt with debt consolidation programs is simply increasing the amount you’ll owe. Debt consolidation firms are good at working out deals with your creditors because the less money they have to pay out to them, the more they can keep from your ‘low monthly payment’ to them.
Other risks of debt consolidation programs include incurring late fees on your credit card itself. Sometimes the companies take a while to process your request or to actually start paying your debt off for you. This can lead to miss payments on your debt leading to lower credit scores and even more money paid out in fees and interest.
Should I get help from a debt consolidation program if I can’t make minimum payments?
This article is telling you that debt consolidation does not work, but you are sitting there wondering how you’ll pay your next minimum payment. Debt consolidation programs should be a last resort.
Instead consider the following before ever calling a debt consolidation company:
– Call your creditors. Say you have a credit card with a monthly payment you can no longer afford or can barely afford. Call them and be honest about it. If you’ve made payments on time for a good period of time, they may be willing to listen. After all, getting some money is better then no money. You may be able to lower your interest or reduce your monthly payment.
– Transfer balances – If your credit is good, consider transferring your balances from high interest cards to lower interest cards. Many banks offer balance transfers to a new card, just read up on the terms of the transfer such as interest and balance transfer fees.
– Pay as much as you can – If at all possible, just keep paying down your debt. Don’t spend anymore on that credit card until it is paid off. Sell some things, pick up some extra hours at work, do whatever you can to keep making the minimum payments.
If you still can’t make the minimum payments and your creditor won’t cut a deal with you, a debt consolidation plan may help you for now. But again, debt consolidation companies should be a last resort. You may pay them a flat rate less then what you were paying, but consider how little of that payment is actually going to your debt. Debt consolidation companies really just offer a way to avoid damaging your credit history while making a lot of money doing so.