Entries from January 2013 ↓

How You’re Wrong About Debt Consolidation

How You’re Wrong About Debt Consolidation

With so many mixed messages presented by so many different sources, it can be difficult to know which to believe when it comes to finances. Facts can be misrepresented and myths develop a life of their own. But if you find yourself reading this article because you’re considering debt consolidation, read on. There are three myths that will be debunked in the following paragraphs.

Myth #1—Debt consolidation causes damage to your credit rating

In reality, the act of debt consolidation is a way of better managing your debt so that your credit report is NOT totally damaged. Consolidation shows that you are serious about paying off the debt. In fact, putting all of your debts together in one loan often shows up on the credit report as balances being paid off.

For example, assume you had a $2000 balance on a credit card that charged 12% interest, a $5000 balance on a different card that charged 15% interest and a $3000 balance on a third card that charged 18% interest. If you went to your bank and negotiated a loan for $10,000 at 10% interest, you could pay off all three credit cards with the money from the loan and save money on interest in the long run, too. In addition to only having one debt payment each month, you have shown those three credit cards paid off on your credit report.

What’s the catch? Well, it’s simple. You have to make your payments on the consolidated loan in full and on time to maintain the good credit standing.

Myth #2—Debt consolidation is the same thing as debt settlement or bankruptcy

Actually, the three are very different approaches to resolving debt. Debt consolidation is a strategic plan to pay off all of your debt. Debt settlement, on the other hand, is an attempt to reduce the amount you owe to various creditors to help resolve unpaid balances. Bankruptcy is the most complicated of the three because it involves court proceedings and a judge. Additionally, bankruptcy stays on your credit report for a number of years and will affect your ability to acquire loan money in the future.

Myth #3—Debt consolidation costs you more funds over time

The common argument that created this myth is that consolidation loans are only able to lower your credit payments by extending the life of each loan. An extended loan means you pay interest for a longer period of time. So, under certain circumstances this myth can be true. However, it is not universally true and does not HAVE to be true for you.

Take the earlier example as a case study. If everything else remained the same (length of loan, minimum payment, etc.), you would save approximately $45 each month in interest charges by consolidating at 10%. Choosing to apply that $45 to the remaining balance on your loan would serve two purposes: paying off the loan faster and paying even less interest. Take time to do the math to determine what would be the most beneficial for you financially over the course of the loan. Resist the temptation to assume the worst because you heard a myth.

Tiffany Marshall is a freelance writer who writes on behalf of the debt collection professionals at Direct Recovery. Call them for some of the lowest debt collection rates in the industry.

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