It may seem contradictory, but just because you consolidate debt, it does not mean you are fixing your finances. This is particularly true if you use those low/no-interest checks that come with other credit statements. At least for the most part, anyway.
Be Wary of Low Rate Offers
The truth about using low-rate offers from credit companies to consolidate debt is that they expect you to continue carrying a balance beyond the offer expiry date. If you consolidate debt this way, you need to be extremely disciplined and make sure the loan is repaid in full, especially since some creditors add fine print that can have the interest for the full balance charged back to you at a much-higher “regular” rate.
Can Debt Consolidation Help Me?
Sadly, people who have no choice but to consolidate debt will have been led to such a decision based on reasons that are already showing up in their finances or on their credit report. This means they no longer have an ability to make their existing payments or they have already made some payments late. When a lender looks at such an application, even if it is to consolidate debt, they will see an inability to service the debt and/or a deteriorating credit score. The resulting loan, if granted, will therefore come at a higher rate and possibly even a higher payment.
What Do I Do Now?
In cases where you are solvent (you earn more than you must repay to creditors, including landlords, insurers, etc.) you may not want to consolidate debt given what will inevitably result in higher payments and interest. Instead, consider putting a repayment plan together, one that you can stick to. The result will be a lower debt load with the bonus of gradually improving your credit score.
And If I’m Not Solvent
Where income falls short of meeting the bare minimum in terms of debt obligations, you do not need to consolidate debt; you need professional assistance from a credit counsellor. The counsellor will be able to make appropriate recommendations and give adequate assistance after fully investigating your circumstances. Of course, this would not apply to situations where income shortfalls are temporary (e.g. layoff, vacation, etc.) and it is known that income levels will return to normal.
Where Do I Start?
Start by evaluating the situation. Obtain a copy of your credit report to see just how “bad” things are. You can also make some calculations or invest in a personal finance book. If you are still looking to consolidate debt, remember that not all solutions are created equally. The odds are against you if you use low-rate offers and if you are looking for a loan to consolidate debt, understand that you will probably not be getting yourself farther ahead financially.
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