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The Debt Consolidation Danger

There's no doubt that debt consolidation can be a very useful way of dealing with debt problems if you do it correctly. When all goes well, you'll end up with lower monthly repayments, a simpler financial life, and an end to the worry of being behind on payments and struggling to keep your head above water.

However, if you handle the process badly there's a very real possibility that you'll end up in a worse position than when you started. How could this be?

The problem lies in the fact that you're not actually getting rid of any of your debt, just shifting it around to hopefully make it more manageable. Depending on the terms of your loan, you might well end up paying more interest overall before the loan is cleared, but that's not the real problem.

A very large proportion of debt consolidation loans are taken out to clear credit cards, overdrafts, and other kinds of 'revolving' debt which doesn't have a set repayment schedule, and more credit is always available providing you stay within your limit.

Now, let's say you've been approved for a debt consolidation loan, all the figures work out, and you'll be paying a lot less each month, so you clear all your credit cards and so on, leaving lovely clean balances all round. Maybe this deserves a celebration - maybe a nice shopping splurdge on your old card, or a fancy meal, or... STOP! This way lies disaster. Once the consolidation is complete, it's essential that you close all your credit card accounts, ask the bank to cancel your overdraft, and otherwise get rid of all your lines of credit.

Of course, you may wish to keep one card or a small overdraft for emergencies, but it's vital that you don't see them as a way of spending when you don't have money - that's likely what got you into trouble in the first place. Carry on in this way and you'll soon find yourself with credit card debts once more, to go along with the consolidation loan repayments. And this time there'll likely no further consolidation option as a 'get out of jail free' card...

So once your card balances are cleared, physically cut them up, and write to the issuer telling them to close the account - or if you're keeping one emergency card, ask them to lower the credit limit, then lock the card away in a drawer and forget about it!

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