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February 26th, 2009

Can Debt Consolidation Lead to More Debt?

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Consumers everywhere are looking for solutions to their debt problems. If you can afford your monthly payments but are looking to reduce and eventually eliminate the amount of debt you have, debt consolidation might be an option you have looked into. It is one of the few debt elimination strategies that allows you to protect your credit standing during the process.

Appealing Solution

You may be drawn to debt consolidation due to the convenience it presents. You’re able to lump all of your debts together into one new debt and make one payment each month. In most cases, the interest rate on the new loan is lower than that of the interest rates you were already paying on your existing debts.  As times become more difficult, you’re probably excited about your required total monthly payment dropping as well.

Your Plan

If you’re like most consumers that consolidate their debt, you start the process with the best intentions. First, your plan is to begin living within your means. You’ll cut our unnecessary spending and certainly will no longer rely on credit to make purchases you don’t really need.

You also plan to apply the monthly savings every month back towards paying the debt down. Your ultimate goal is to be debt free so you want to pay as much as you possibly can each month.

What Really Happens?

Unfortunately, for many, debt consolidation leads them down the wrong path.

While the monthly payments are now lower, your assumption that it was due to the lower interest rate may be wrong. Some debt consolidation companies structure the new loan so the repayment term is longer than the original loans in an attempt to reduce the required monthly payment. This creates a false sense of savings.

You had planned to reduce your spending and end your reliance on credit cards, however, after having consolidated your debt, you have several credit card accounts that are open with plenty of credit available. You begin down a slippery slope of charging a little bit here and there.

The monthly savings you had intended to use to accelerate the pay off begins to be used for emergencies or other things that pop-up unexpectedly. You may even find that as you begin charging again to the credit cards you freed up through consolidation, your total debt actually begins to grow. The monthly savings you had initially experienced begins to be used to offset the increased monthly payments on the higher debt load.

Debt consolidation can be an excellent solution for the right individual. You must be honest with yourself and responsible with how you handle the process. You need to be attentive when speaking with debt consolidation companies and understand all the terms involved. The consequences of not handling debt consolidation the right way can lead you the opposite direction of where you want to go.

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

Post written by Chris Rocks

5 Responses to “Can Debt Consolidation Lead to More Debt?”

  1. Jimmy Says:
    March 4th, 2009 at 1:30 pm

    Great article! I would like to point out another pitfall that a lot of people don’t often think about and isn’t mentioned here though. Debt consolidation is a lot like balance transfers from one car to another that has lower interest rates. What the credit industry doesn’t want you to think about is how they are turning fees interest and other intangibles into solid debt. Are you confused yet? Let me explain a little… when you default on an account, there are fines imposed. These fines, in the form of higher interest, penalties and fees are negotiable with the original creditor, but only if they retain the debt. If you “sell” the debt (balance transfer), the purchaser is paying for the total amount, including what would otherwise be negotiable, not just the amount that was borrowed and you lose the ability to negotiate on those extra fees and penalties which could be up to 50% of the original debt. This is how and why debt settlement has become so popular lately. But debt settlement isn’t the best answer either… there is a site that covers all of it and calls the process debt resolution. They don’t require you sign a membership, the site is free to peruse and if you want to know more you can find them at weatheringdebt.com

  2. JAN WEBNER Says:
    March 27th, 2009 at 1:13 pm

    I AM A DISABLED SENIOR CITIZEN WHO MADE ONE MISTAKE AND ALL MY CARDS RAISED MY INTEREST RATE SO HIGH I CAN’T MAKE THE PAYMENTS. I HAD EXCELLENT CREDIT UNTIL EIGHT AGO. CAN YOU PLEASE HELP ME? THANK YOU, JAN WEBNER

  3. Pre Paid Debit Cards Says:
    November 16th, 2009 at 6:01 pm

    Nice post! This is also my biggest earning area. However, its not a much yet, but I am sure it will improve.

  4. helenth01 Says:
    June 23rd, 2010 at 2:50 am

    There is nothing called a free lunch is this world. If anything needed to be resolved then initiated need a support to be sorted out. Well, it’s amazing. The miracle has been done. Well done. Hat’s off. Well done, as we know that “hard work always pays off”, after a long struggle with sincere effort it’s done.
    ==============================
    <a href=”"http://www.mydebtsucks.com"” rel=”"nofollow"”>Debt</a>

  5. Debt Says:
    June 29th, 2010 at 9:27 am

    <a href=”"http://www.mydebtsucks.com"” rel=”"nofollow"”>Debt</a>

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  • Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score. Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management. He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others. He can be contacted by visiting his personal site, GoodCreditLiving.com.

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