3 Worst Debt Consolidation Strategies

If you have accumulated a lot of credit card debt, then chances are that you have considered debt consolidation. Many people end up consolidating debt so that they are making only one monthly payment and usually the payment is lower. There are good ways to consolidate your debt, for instance, through a home-equity line of credit and a mortgage refinance. There are also bad ways to consolidate your debt, and by understanding these traps, you can avoid a costly mistake.

1. Hard Money Loan

Hard money loans can be mortgages or personal loans that are secured with collateral. You will be asked for a large down payment or collateral like real estate, jewelry or a car. These loans carry high interest rates. And with a high rate, you are more likely to default and lose the collateral you put up. The only advantage to a hard money loan is that there are no credit requirements. Overall, these should be avoided for debt consolidation.

2. Hiring a Debt Consolidation Company

Debt consolidation companies are everywhere, and their convincing ads can be seen all over television and newspaper outlets. They are looking for people who are desperate and in a bad financial situation. They promise huge savings and debt reduction. In reality, this isn't possible. It is possible to reduce your credit card rates and possibly your balance. This is up to the lender and whether they are willing to work with you. Hiring a company is not to your advantage. They are costly, and the same work can be done by you for free by investing a little time and being persistent. Debt consolidation companies are not free, and they often make promises that are not reasonable. Some credit counseling services can be helpful, but they should be free or very inexpensive not-for-profit agencies that will help with budgeting and making a plan for repayment.

3. Balance Transfer Trap

You probably receive new credit card offers weekly in your mailbox. Credit card companies are in fierce competition for your business. If you have credit card debt but still pay on time every month, then credit companies want you. You are profitable for them because of the huge amounts of interest you pay. These companies will offer you great introductory rates and advertise 0 percent rates on balance transfers. The problem is that the rate will increase to a much higher rate very quickly. This will cause you to no longer be able to afford the new monthly payments. Also, there is usually a transfer fee of 3 to 4 percent. So if you have a zero percent rate, but paid 3 to 4 percent in fees, then your rate isn't really zero percent. They count on the fact that you will not have your debt paid off before the introductory rate expires, and often they are correct, and you pay big in the long run.