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If you’re sick and tired of dealing with credit card debt, chances are you have looked for ways to get out of it without losing your sanity. Even with the best intentions, however, you may find yourself looking at an even bigger credit card statement month after month.
Tack on the overwhelm of outstanding existing bills and you will probably reach a breaking point with your financial anxiety, right?
I don’t mean to bring up anxious, unwanted feelings; no, I want to help.
Because chances are, you have already considered debt consolidation as an option but aren’t sure where to start or perhaps, what it really means to consolidate debt.
In a nutshell, consolidating your debt just means rolling your payments into a single payment and making just one payment each month until the debt is paid off, ideally at a lower interest rate.
Sounds good, right? Debt consolidation certainly has helped others get rid of debt once and for all, but it’s not necessarily right for everyone.
Before jumping in, it’s good to be aware of the major pitfalls and traps you should avoid. While the best debt consolidation firms out there are reputable and genuinely helpful, it’s always good to be cautious when it comes to making big financial decisions.
So, without further ado, here are four traps surrounding debt consolidation you should do your best to avoid.
1. Succumbing to higher-than-necessary interest rates
This is the first trap you will likely encounter if you don’t research a debt consolidation program thoroughly enough.
Combining all your debts into a single monthly payment is fast and easy, but what about when the payments get under way? Are you left with hefty fees you didn’t know existed before signing the dotted line?
Companies sometimes rack up interest rates making a lower payment not what it seems. A lot of companies will raise this interest rate simply because they are lowering your monthly payment. In reality, they are the ones making money while you still shell out your monthly payment.
Be sure to ask any debt consolidation firm you are considering what their interest rate is and if it will remain constant. If it seems higher than expected, keep looking for a company that offers a manageable payment with a manageable interest rate. It will be worth it, I promise.
2. More fees than necessary
Debt consolidation isn’t free and the fees associated with most debt consolidation programs range in price and percentages.
Be sure to pay attention to monthly and upfront charges and factor these into your “lowered” debt payment structure. You could (and should) ask for the company’s fee schedule so there are no discrepancies further down the line. If the company fails to provide a written list of recurring fees, it’s probably a good indicator to look somewhere else for help.
3. Not knowing what debt to consolidate
Not all debt is the same – some debt is actually worse than other debt, some secured and some not, and it’s important to know the differences before consolidating.
When you decide to go with a debt consolidation company, it’s a good idea to first focus your efforts on paying off eligible debts with higher interest rates. Then, if you are able, pay off the lower interest rate debts on your own.
The takeaway is: Just because you can roll all of your debt into one payment, doesn’t mean you have to. You’re in full control of what happens with your accounts.
4. Landing back in debt
This is a big one. After working so hard to pay off your debt, the worst thing you can do for you and your finances is to get into the same predicament again.
Be cautious of your spending habits during and after you finish paying down your debt so that this never happens to you again.
It’s important to be honest with yourself here. Ask yourself, do you have poor spending habits? Do you know how to budget? Reflect on how you accrued so much debt the first time around in order to learn from the past and move forward consistently debt free.
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.