Beware of These 3 Common Missteps Before Consolidating Your Debt
If you're searching for a way to streamline your debt obligations, debt consolidation is a pretty desirable option. "Debt consolidation is a technique used to combine multiple existing debts into one singular loan, ideally with a lower interest rate," says Grant Sabatier, author of Financial Freedom: A Proven Path to All the Money You Will Ever Need. When you do this, you are taking a lump sum of money from a new source to pay off your old debts, he says. This source could be a balance transfer credit card, a personal loan, or refinancing your home mortgage.
Although making one consolidated payment may be easier, more convenient, and may offer a lower interest rate, financial experts will warn to proceed with caution. Missteps along the way could impact your credit rating or put you at unexpected financial risk.
Here are three debt consolidation mistakes to be on the lookout for when researching debt consolidation options.
The Bottom Line:
As you're considering your debt consolidation options, it's important to understand how you got to this point. Do you have spending triggers? Do you open new lines of credit because of overspending? Getting to the root of the issues of what got you into debt in the first place is certainly a step in the right direction. "If your spending habits are not responsible, then consolidating your debt and paying off your balances will only then free up credit for you to overspend with once again," says Michael Cummins, director of finance at Insurance Geek. "You'll find yourself in a vicious cycle of going into and out of debt." Instead of continuing that cycle, Cummins says to address your spending habits and learn how to be more responsible with money before consolidating your debt and paying it off.