Considering your consolidation options
Consolidating debt is a lot like sorting dirty
laundry: You're not improving the situation, you're just moving
things from one pile to another.
"If you don't deal with the behavior that got
[you] there in the first place, you're not solving the problem,"
says consumer adviser Clark Howard, co-author of Clark's
Big Book of Bargains.
But if you're in great shape financially, have
no problems paying the bills and have an emergency fund set aside,
you're a good candidate for consolidation -- and you have more options.
To consolidate or not to consolidate
Decide what you want to achieve with consolidation.
Do you want to lower your interest rates? Do you want to lower your
monthly payments? Or just stretch out the terms on your loans? If
it's one of the last two, tread carefully.
"If you really want a get-out-of-debt-free card,
you've got to understand how you got into the mess and fix the mess,"
says Wayne Bogosian, co-author of The
Complete Idiot's Guide to 401(k) Plans.
"People solving symptoms with debt consolidation
are on the verge of making the problem worse," he says.
There are three ways to lower your monthly payments:
qualify for a lower rate, put up collateral to reduce the risk and
the rate, or stretch out the term of the loan, says Bill Hampel,
chief economist with the Credit Union National Association.
If you now qualify for a lower rate with your creditors
because of falling rates or better credit, "this is a perfect
example of how consolidation can help you," Hampel says.
But consumers need to remember that the debt,
even at better terms, is still there. And they still have to be
diligent about paying it off before they add to it.
For a smart move, look at what the consolidation will
cost you for the total life of the loan, not just the monthly payment,
says Todd Mark, spokesman for Consumer
Credit Counseling Service of Greater Atlanta. And tread carefully.
"Consolidation is so dangerous, especially for
the typical consumer we see," he says. "After consolidation,
they get a false sense of relief. So often the worst cases we've
seen are people who have consolidated into their mortgages."
Consolidation also can hurt your credit score if it
involves a credit card, home loan or line of credit, says John Ulzheimer,
business development manager for MyFico.com,
a division of Fair Isaac Corp., the company that developed credit
"Debt consolidation always has an effect on the
credit report, so it always has an effect on the credit score,"
he says. Just how much the score will change, and for how long,
depends on your report and how you treat your consolidation loan.
Want to gauge just how much that new card or
loan could affect your credit? Go to the Fico
Score Estimator at Bankrate.com. Calculate your score with and
without the consolidation option.