3 Debt Consolidation Myths

by Craig Peters, Contributing Writer   

"Achieve freedom from debt! Say goodbye to financial stress! Start your fiscal life all over again!"

Such is the hype that surrounds many debt consolidation services. A debt consolidation loan can be a good tool for managing your personal finances, but it's not the perfect answer to all your debt management problems. That's why it's important to look beyond the hype to understand how debt consolidation meets your unique financial needs.

To help you do exactly that, let's look at a few common myths about debt consolidation:

Debt consolidation will save me money.

Probably not. While your total monthly payments may decrease as a result of consolidating your debt, the amount of time needed to pay off that debt will probably increase. Your monthly budget will be easier to digest, but the total interest and fees you pay over the life of the loan are likely to increase.

Using a professional debt consolidation company is a smart idea.

Not necessarily. Such companies make their money through fees that can amount to a hefty percentage of your overall debt. Plus, your creditors aren't obligated to respond to a debt consolidation company the way they would need to respond to a lawyer — and all those unanswered collection calls will wind up as negative entries on your credit report.

A zero-interest credit card is a great way to consolidate my high-interest debt.

Not always. Companies offer zero percent as an introductory rate to get you through the door. Once the introductory time period has passed, the rate can shoot up to 15 percent or more. You could wind up paying more in interest than you're paying now. You could shift the debt to another zero-interest card and then another after that and so on, but that practice can negatively affect your credit rating.

Don't be discouraged. Debt consolidation can be a smart financial decision in many situations. What's most important is to think about all the potential pitfalls, do all the math, and consider every aspect of your own financial picture — then make the decision that's right for you.