Money Matters: Debt Consolidation Myths

As Americans’ credit card debt levels climb, 29% are facing challenges with their liabilities, according to New York Life. That means millions may need solutions such as debt consolidation, but they might be finding confusing or misleading information about the process.

“Debt consolidation offers a way to combine multiple debts into one payment to provide a streamlined way to repay. It's often an excellent solution for individuals overwhelmed by multiple bills looking to regain control of their money,” said Michael Sullivan, a personal financial consultant with Take Charge America, a nonprofit credit and housing counseling agency. “But like other forms of debt relief, it can be difficult to separate truth from fiction.”

Sullivan busts five common myths about debt consolidation:

• You can’t pursue consolidation yourself. False. Despite what you may hear elsewhere debt consolidation is a process you can initiate yourself. Consolidation can take many forms including a debt management plan, balance transfer credit cards and personal loans. Research the various solutions to determine what might work best for you. A nonprofit credit counseling session can also offer an unbiased assessment of your unique situation.
• Consolidation eliminates your debt. False. Although consolidation is a great solution to gain control over your debt by combining many debts into one payment, you still must repay the balance. Consolidation is not forgiveness.
• You must have good credit to pursue debt consolidation. Mostly false. When applying for a consolidation loan, good credit can help you secure better terms and a lower interest rate. If you explore a debt management plan, your credit score is not a factor in qualifying for the plan or obtaining lower interest rates.
• You always save on interest. False. You may save on interest, depending on the terms of your consolidation loan. But even with a lower interest rate, you may end up paying more in interest over the full term of the loan if you extend the repayment period.
• Consolidation traps you in a cycle of debt. False. Like other debt relief options, consolidation is a tool to help you regain control over your financial situation. It does not solve the underlying issue, which often is overspending and poor money management. If you don’t address these issues yourself, you can easily fall back into debt.

To learn more about debt consolidation or other debt relief options, visit Take Charge America.

 

About Take Charge America, Inc.

Founded in 1987, Take Charge America, Inc. is a nonprofit agency offering financial education and counseling services including credit counseling, debt management, student loan counseling, housing counseling and bankruptcy counseling. It has helped more than 2 million consumers nationwide manage their personal finances and debts. To learn more, visit takechargeamerica.org or call (888) 822-9193.