Bill Consolidation – Why it Doesn’t Improve Your Financial Situation
Are you drowning in monthly credit card debt payments and looking for a way to stop the harassing calls from creditors and debt collection agencies? Have you searched for “bill consolidation” or similar services? Bill consolidation or debt consolidation is a program that often boasts its convenience and ability to save you money with lower interest. In reality, these programs pose some serious dangers to consumers. Let’s take a look at what bill consolidation is all about and what it can’t do for you.
What is Bill Consolidation?
There are two main types of bill consolidation. One involves taking out a new loan with a debt consolidation agency in order to pay off debts with high interest rates. The other involves using an asset, usually a house, as collateral to pay off high-interest debt.
How does Bill Consolidation Work?
Using a debt consolidation company: The idea behind debt consolidation is that you can make one payment toward a loan that has a lower interest rate than the other debts in your name. For example, you may have a few credit cards with interest rates around 15%. Maybe you decide to contact a debt consolidation company in order to get help. The company tells you that you can have a lower monthly payment and a lower interest rate (let’s imagine the interest drops to 10%) through a new loan.
Doing it on your own: Sometimes, people try to “self-administer” a similar plan. For instance, people will open a 0% APR credit card and use this to pay off other debts.
In both cases, the consumer is in danger. Using a credit card is risky because the introductory rate will expire and the new rate could be very high. The rates also climb quickly if you miss a payment or pay late. Going with a debt consolidation agency is risky because you will actually pay back more in the long-run. While these companies advertise lower interest rates, they don’t tell you that this causes you to pay more money and to pay for a longer time. And usually, these agencies aren’t interested in helping you budget and save money along the way, so you can’t count on them for reliable and helpful credit counseling.
The debt consolidation agency will promise:
- Lower payments
- Lower interest
- A way to get out of debt fast
You will actually experience the following:
- Longer repayment
- More money paid in the long-run
- A lack of financial resources that can actually change or improve your spending habits
Using an Asset as Collateral to Pay off Debt
The other type of bill consolidation involves using an asset as collateral for your debt. This is called secured debt consolidation, and it’s arguably the worst form of consolidation. A common asset used in this method is a house. Basically, a homeowner can liquidate equity in a house (in other words, they get cash for the amount they have already paid toward the mortgage) and use this to pay off high interest debt. The catch? The house will be refinanced, and the homeowner will lose any traction he or she has gained toward paying off the mortgage. For example, if you used $40,000 in home equity as bill consolidation to pay off high-interest credit card debt, you now have to make up that $40,000 in house payments, and you may have different terms when you refinance. If you run into further financial trouble in this scenario, you may lose your home.
The Biggest Problem with Bill Consolidation
Clearpoint Credit Counseling Solutions does not recommend these methods. Sure, they can work, but they put the consumer at risk. If you aren’t doing a good job of paying off debt, taking out a new loan probably isn’t a great option. And, you certainly don’t want to risk something valuable, like your house. What’s more important is to change your behavior so that you become financially healthy. Unfortunately, bill consolidation programs don’t do this! If you use a “quick-fix,” risky method to pay off debt, you won’t solve the main problem—your habits!
An Alternative to Bill Consolidation
Clearpoint Credit Counseling Solutions is a nonprofit agency that wants to help you improve your overall financial situation by empowering you with knowledge, tools, and other resources. We will provide you with free budget and credit counseling and determine what your needs are. We won’t sell you something you don’t need or enroll you in a program that’s not right for you. We do have a program that is a positive alternative to bill consolidation—it’s called a Debt Management Plan. Get your free credit and budget counseling today to see if this program is right for you.
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