Money 101: Should You Consolidate Debt?


About 17 years ago, I found myself in a place I really didn't want to be. I was more than knee-deep in debt and struggling to just make the minimum payments on things.
My income had taken a series of hits; including a job loss and 6 months of unemployment when I just gave birth to my son. Ugh. It was not a pretty time. I did eventually find a job, but it was a 3-11 shift (and yes, I was very thankful for the work). So I had a mountain of debt that piled even hired during unemployment, a new son who really didn't like to sleep and I was managing to get by on about 4 hours of interrupted sleep a night. It wasn't pretty.
And then, disaster struck again. 
My mom had getting treatment for colon cancer and it took a final turn for the worst. For almost three months my sister and I divided our time between work, family and being at the hospital.I was on complete and total overload.
So what does that have to do with Debt Consolidation?
Somewhere in there I knew I had to do something, so I decided to go to a Credit Counselor. They went over my debt challenges and helped me figure out the total amounts that I owed. It was staggering. Especially considering that my income had fallen about $6,500 a year. Crazy scary. I won't lie to you. I started having panic attacks over the whole thing.
The Credit Counselor helped me put together a repayment agreement. The credit card companies dropped their interest rate and agreed to a repayment amount and I was given a time period before I would be debt free. Sounds great, right?!
Here's why I think you shouldn't consolidate your debt.
If you are following the Dave Ramsey method of paying off debt then you are familiar with the Debt Snowball. This is where you organize your debt smallest to largest and pay off the smallest first, rolling the payment from the first debt into the next debt until you have paid them all off.

Card #1: 20.00% INTEREST and a balance of $2,400.
Card #2: 23.00% INTEREST and a balance of $1,400
Card #3 16.5% INTEREST and a balance of $2,000

Now, with the Debt Snowball method you would start off paying off the balance of $1,400, paying as much as you can toward the payment. Once that amount is paid off, you roll all of what you were paying toward that card into paying off the $2000 balance.  (By the way, there is much more to this process, but this is simple for a reason.)

Now, say you decide to do Debt Consolidation. You would end up paying an amount that is at the very least equal to $5,400. You would have one payment and one interest rate.
Sounds great, doesn't it?!
No, and here's why. By rolling all of those amounts together you may end up paying more than the original amount on the lowest balance. You are pushing those payments out farther and assigning an interest rate that may be much higher than the original interest rate. If you hadn't rolled it together you would have been able to pay off the original amount and continue the Debt Snowball method by rolling that payment on to the next. You are not extending the debt.
Just a few last things. 
Usually when you do a debt consolidation plan to pay off your debt you are making an agreement with the credit card companies. That means that the original debt stays on your credit report and a new credit is opened in the full amount! Yuck!
Also! This debt consolidation stays on your credit record for an extended period of time. You would need to check on this, but I know for me it was 7 years. Even after I paid off the consolidation early.

Ultimately, it's up to you and what works for you. I wish you all the best.  





No comments:

Post a Comment

 photo envye.jpg
envye blogger theme