People have all sorts of misconceptions about debt consolidation. While it’s impossible to debunk every tall tale, it’s important to know some basic truths before starting the consolidation process. These are a few debt consolidation myths to avoid.
It’s Guaranteed to Work
There are some things you might hear about debt consolidation that are myths. But there’s a difference between a myth and a scam. Let’s start off by examining something that should set off red flags right away; someone saying debt consolidation is guaranteed to work.
Pretty much any time someone is making a guarantee when it comes to finances, they’re trying to pull one over on you. There are essentially no situations that are certain in the financial realm—especially when it comes to dealing with debt. Turn around and walk away if any organization makes claims that sound too good to be true.
It Will Destroy Your Credit Score
Many people assume debt consolidation is a surefire way to blow up your credit score. This, however, isn’t necessarily the case. When it comes to debt consolidation, you should theoretically be helping your credit score if you’re able to more effectively pay down your debt. Credit utilization and paying on time make up a huge portion of your credit score. Debt consolidation can make it so your payments are more manageable—improving your situation on both of these fronts.
There are two ways, however, your credit score can be hurt by debt consolidation. The first is having someone pull your credit history, which can knock off a few points. This typically isn’t something you have to worry about in the long run. On the other hand, your credit will be damaged if you consolidate your debt and don’t pay back the new loan.
You’re Going to Get Scammed
This is sort of the opposite sentiment of the first point. While you should always be on the lookout for fraud when working with your finances, debt consolidation in itself isn’t a scam. There are multiple forms of totally legitimate ways to consolidate debt.
First, credit card balance transfers are one of the most common forms of debt consolidation. Opening a new credit card with a low introductory rate and moving your other account balances onto that one accomplishes this. Balance transfers are done through credit card companies and banks, which aren’t scammers.
It’s important to keep an eye out when looking for debt consolidation services through a debt relief agency though. Some are not going to be legitimate organizations. Companies like Freedom Debt Relief, which are endorsed by organizations like the American Fair Credit Council on the other hand, have a solid history of helping consumers manage their debts.
It Costs a Lot of Money
Some people have the idea in their heads that consolidating their debt is an expensive process. Others would argue it’s far more expensive to be carrying around a lot of high-interest debt. However, even when you factor in the potentially lowered interest payment, there is another reason this qualifies as a myth.
Oftentimes, the fees for consolidating debt are not very high, or totally non-existent. This runs counter to the common idea that it’s an expensive process. Consider whether you’ll benefit in the long run from the lower interest rate versus a small upfront fee.
You Can Consolidate Any and All Debts
While you can use debt consolidation for credit cards and other kinds of high-interest unsecured debt, you can’t just roll anything into a consolidated loan. For instance, you generally can’t consolidate student loans with credit card debt. They can be consolidated through separate processes, but not together.
Furthermore, you don’t even want to consolidate some kinds of debt with your credit cards. Mortgages and car loans typically come with lower interest rates. It wouldn’t make sense for you to even try to consolidate these forms of debt. Refinancing is the process for these types of loans.
There’s a lot of misinformation out there about debt consolidation. Make sure you take your time researching different options in order to find what’s best for your unique situation.