6 Tips for Informed Debt Consolidation

The debt consolidation industry has grown in leaps and bounds over the past couple of decades. If you are in over your head with excessive debt and are considering bankruptcy, it is advisable to look into debt consolidation as an alternative. Debt consolidation involves the pooling of all of the smaller, individual debts you owe into one larger ‘consolidation loan,’ allowing you to make only one – hopefully affordable – payment and to eventually pay them all off.

While debt consolidation can seem like a debt relief dream come true to someone stressed with money issues, there are some caveats. Debt relief is almost always a better alternative than bankruptcy, however there are potential pitfalls you need to be aware of. As with any pursuit, an informed consumer is one who will win out in the end. Let that be you!

Here are some tips to consider as you navigate the debt consolidation information available to you:

1. Keep in touch through this process. Although the last thing you may want to do is speak with your creditors, it is important that you maintain your reputation with them. Call each of them and explain your situation, and that you will be consolidating your debts in order to ensure you can pay them. Some creditors may even wish to negotiate with you individually, so you may want to make these calls as a last-ditch effort before you go through with the consolidation. Perhaps with a few phone calls you can have some of your interest rates or payment amounts lowered, and avoid debt consolidation altogether.


2. If you find it necessary to take the next step, debt consolidation is almost always preferable to bankruptcy. This is in large part due to the fact that your credit rating – otherwise known as your financial report card, and used by potential lenders and employers as a way to judge your creditworthiness – is not adversely affected by a debt relief loan. If done right, your credit report will show the history of someone who makes good on their debts and does whatever it takes to pay them off. Bankruptcy, on the other hand, effectively ruins your credit for the next 7 to 10 years, depending on where you live. You will have little chance of receiving credit cards, loans for purchases such as cars and houses, etc., with a bankruptcy on your credit history.


3. Not all debt consolidators are equal. Some truly act in your best interest, and others don’t. Shop around and ask around. Check with everyone you can think of who may have some knowledge in this area – your financial advisor, lawyer, and friends and family. Get referrals. Even though you may be embarrassed, ask at your bank as well – they will be able help you find a reputable debt consolidation company, and they may even offer you options you didn’t know you had. No one wants to see you go under, and most banks, especially in today’s financial climate, will want to keep their valuable customers.


4. When dealing with a debt consolidation company, always read the contract they wish you to sign, including (especially) the small print. Just as some credit card companies will tell you in small print that should you be late on a payment your interest will skyrocket to 30%, some debt consolidation companies are in the business for the ‘suckers,’ and you can end up even worse off in the long run if you’re not careful. This is not to say you should not go forward; it is merely a warning to know what you’re getting into, as you should with any contract you sign. Contracts are legally binding documents, and you are giving your word – legally – that you will not only make payments as promised but also fulfill any obligations should you miss payments. It is these obligations which you should read carefully – they could be steep and get you into trouble. Be sure you negotiate payments you can handle to avoid sticky situations.


5. In order to clear your debts - and your mind – as quickly as possible, consider ways of making extra money to pay off the loan. If you don’t already have one, you may have been searching, but your mindset before this debt consolidation was likely different; searching for a job when you are feeling fearful and desperate is different than looking when you are feeling in control of your financial future and positive. The faster you can pay the loan off the better, of course, and if you have a set loan amount ie. cannot pay it off faster, you can begin a savings program which will make you feel even more fabulous – in control and looking forward to the future as you deal with the consequences of the past.


6. As a final tip, remember that you are not your money. You can change your habits, but you must look honestly at how things got this way. Are you a sucker for those department store credit card offers? Stop it. As they say, if you are deep in a hole and want to get out, the first thing is to stop digging.

No matter how challenging your situation, the best things you can do are to take responsibility and look to – create – a better future by changing things for the better. You have more control than you may believe, and when you seize it and begin to use it, you’ll feel better and better. Good luck!