What are the biggest mistakes people make when they consolidate credit card debt? It’s a good question primarily because consolidation has become a good option for many people facing financial problems. While some people are hyper focused on the impact a consolidation can have on their credit rating; they are missing the importance of consolidating their credit card debt correctly. In fact, any of the common consolidation mistakes listed below could cost you a bundle.
Common Consolidation Mistakes
- Going through it alone: While you are having financial difficulties you may feel like you don’t have the resources to hire a debt professional. However, a debt attorney has the experience and legal expertise needed to guide you through the consolidation process. Deciding to go through this process alone is not only stressful; it can actually be more expensive. This is the first, and potentially most expensive debt consolidation mistake to avoid.
- You don’t choose your debt professional carefully: There are a lot of options when it comes to getting help with your credit card debt. From debt settlement companies to debt attorneys to credit card counselors you have a lot to choose from. Unfortunately, there are some companies that do take advantage of people. You need to interview and research your choice. Debt settlement companies, in particular, have more than a few unscrupulous participants. “The FTC has brought scores of law enforcement actions against these bogus credit-related services, and the agency has partnered with the states to bring hundreds of additional lawsuits. Further, in 2010, the FTC amended its Telemarketing Sales Rule to protect consumers seeking debt relief services, like debt settlement or credit counseling. The Rule prohibits for-profit companies that sell these services over the telephone from charging a fee before they actually settle or reduce a consumer’s debt”. There are many options available; you should know the differences between those options and look for any red flags.
- You maintain the status quo: Not addressing the root problem is a debt consolidation mistake that can create much bigger issues down the road. Whether you spend beyond your means or had a one-time unforeseen issue such as a medical expense, you need to make some changes. If you are in debt due to overspending, you need to address your habits and adjust them. Consolidating your credit card debt will not fix your finances if you continue to charge items beyond your means to your credit cards. Setting a budget and asking a spouse or loved one to help hold you accountable can help you change your existing habits. If you find yourself in debt due to an unforeseen expense you still need to address your money management. You need to structure your finances to pay off your current debt and set aside a portion of funds to go into savings. A good rule of thumb is to put away 3 to 6 months’ salary in an emergency fund; this will cover expenses such as a short unemployment gap if needed and keep you out of debt.
- You don’t understanding your interest rate. Sometimes consolidating is an attractive option because you can get a lower interest rate and lower your payments. But it’s important to know what type of interest rate is tied to your loan and how that impacts your repayment plan. Loans can have fixed or variable rates. A fixed rate tends to be more expensive than a variable rate initially; but it stays consistent throughout the life of the loan. A variable rate can start much lower but can vary based on market conditions. Be very honest about what you can afford to pay every month and ask yourself if you could handle a rate increase. Beware of very low introductory “teaser” rates as well. These are usually low only for a short period of time before increasing dramatically.
- You don’t shop around. Lenders are competing for your business; they all trying to make their loans the most attractive to prospective customers. So make sure that you look around to find the best loan available. Lenders treat the same criteria differently as well. So if you are in debt but still have good credit one lender may give you better terms than another based on that credit. Rates, terms and financing options will vary so don’t take the first thing you find. Shop around and compare which loan is the best for you.
- You consolidate all your debt blindly. One of the easiest debt consolidation mistakes is to simply lump all your debt together. If you have loans with low interest rates and favorable terms, consider leaving these out of the consolidation. Once you consolidate debt into one loan you are confined to the terms of your new loan. A good example of this is federal student loans. This type of debt has the opportunity for forgiveness, forbearance and deferment. If you consolidate your federal debt into a new loan you lose all these favorable terms. Assess each debt individually and collectively before deciding which debt to consolidate. Your debt professional can also be a valuable resource in helping you choose.
- You don’t read and understand your consolidation terms. A loan is a legally binding agreement and while your situation and the paperwork seem overwhelming, don’t skip the fine print. If there is any portion of your new loan you don’t understand, do not sign for it until you do. Once you sign the loan documents you are legally liable for the loan and held to the rate and terms.
Debt consolidation is a process that is supposed to help make your life easier. If you don’t use this option strategically you could end up making your situation worse. Work with a professional that can help you avoid these common debt consolidation mistakes. If you need help consolidating your credit card debt, please call us at 855-976-5777.
Kevin Fallon McCarthy
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