Watch Out for These Debt Consolidation Missteps

Find the most frequent and common debt consolidation mistakes and learn expert tips on how to avoid them effectively. Gain knowledge of practical solutions.
A woman sits at a table with her computer and works on paying household bills
Written by:
Kevin Payne
Edited by:
Kristin Marino verified

If you’re struggling with debt, know that you’re not alone. The Federal Reserve Bank of New York’s Center for Microeconomic Data recently revealed that household debt in the U.S. increased $286 billion during the third quarter of 2021 (up to 15.24 trillion total).

You’ve probably thought about debt consolidation and whether it’s a good solution. A debt consolidation loan combines various forms of debt into one loan. This type of loan can simplify debt payoff and save you money if you qualify for a low rate.

Debt consolidation may be exactly what you need to work your way out of your financial struggles, but only if done correctly. If you’re not careful, you could make crucial mistakes that could make matters worse. Here’s a look at five common debt consolidation missteps that people make and how you can avoid them.

Compare Your Personal Loan Rates
Check Your Personal
Loan Rates
Choose a purpose for your loan
Always free and will not impact your credit score.

Taking Out a High-Interest-Rate Loan

A debt consolidation loan could be the right choice, but only if it comes with an interest rate low enough to help your situation.

Debt consolidation can not only make life easier with only one monthly payment to worry about, but it can also save you considerable money with a lower interest rate. There’s no given that you will qualify for a loan with lower interest rates than you currently pay, but taking on a loan with a higher rate is almost guaranteed to cost you more over time.

How to avoid this

Shop around for the best rates possible. Many lenders allow you to prequalify or check rates without it negatively affecting your credit score. When choosing a rate, consider your debt-to-income ratio, or the amount of recurring monthly payments compared to your income. A higher rate not only means paying more interest, but it could make it harder to make monthly payments and lead to defaulting on the loan.

If your credit isn’t up to par, consider applying with a co-signer with excellent credit. You can also work to improve your credit score and apply later when you’re eligible for better rates.

If you’ve already made the mistake

It’s ok if you already took out a high-interest debt consolidation loan. You can consolidate as many times as you want as long as you qualify. Check out the rates below and find a new loan with a lower rate than your current one.

Choosing the Wrong Loan Terms

One way to lower your monthly payments is to choose longer loan terms. Unfortunately, this also means that you could end up paying interest on your loan longer than you would with a shorter term, even with a lower rate.

How to avoid this

Choose a loan term that is realistic for your situation. Don’t get stuck on the monthly payment alone. Consider how much interest you would end up paying over the life of the loan term. An interest calculator can help you determine how much you would pay overall.

If you’ve already made the mistake

Consider replacing your current loan with a new loan with a shorter term. The lowest interest rates are typically reserved for the shortest repayment period. If feasible, choose a shorter term that would cut down the interest you would end up paying.

Adding Debt During Repayment

The last thing you want to do when paying off debt is to add more to the total. If you freed up space on your credit cards, don’t start using them now. Credit cards carry some of the highest interest rates around. Charging up your cards again will just make climbing out of debt even harder.

How to avoid this

Do yourself a favor and hide your credit cards or give them to someone you trust to hold for safekeeping while paying off your debts. If you struggle with using credit cards responsibly, consider cutting up your cards.

If you’ve already made the mistake

It’s time to get serious and cut up your credit cards. You’re better off without them. Build an emergency fund to cover unexpected expenses, so you don’t have to rely on credit cards to save you.

Paying Someone to Do It for You

You’ve probably seen ads for companies willing to help you clean up your debt through consolidation. While some people out there want to help, there are also plenty of companies who want to take advantage of your desperation so they can land a payday.

Debt settlement companies will often ask you to stop paying on debts while they negotiate with creditors. Pausing payments could have a negative effect on your credit and ultimately lead to lawsuits from creditors. Some debt settlement companies may even ask for money upfront before providing any services, which is a major red flag.

How to avoid this

Research companies before you decide to trust your debt payoff to someone else. Avoid debt relief companies that:

  • Make sweeping promises or guarantees
  • Charge upfront fees
  • That claim to have access to special government programs
  • It tells you to stop communicating with creditors

If a company makes an offer concerning debt consolidation and payoff that seems too good to be true, it probably is. Check with your state attorney general or local consumer protection agency for information and complaints against any company you consider.

An alternative to consider is working with a non-profit credit counselor. A credit counselor can help devise a debt repayment plan that works for you and your creditors.

If you’ve already made the mistake

If you’re already working with a debt consolidation company, go back and read the fine print of your agreement. Figure out what you’ve agreed to already and what options you have going forward. You may need to seek out legal counsel in some cases.

Ignoring the Cause of Your Debt

If you don’t handle the root of your debt, you will likely end up back in a similar situation down the road. You may be tempted to return to some of the same types of decisions or purchases that led to you seeking out debt consolidation. Spending money or using credit is ok, but failing to take time to understand the reasons you were in debt may lead to history repeating itself.

How to avoid this

It’s time to get serious about your debt and financial missteps. Make a list of your debts. Then, list out the reasons you had those debts or what decisions you made that led to you having to borrow money or rack up credit card bills. Come clean with your mistakes, forgive yourself, and start to build better financial habits that lead to better choices.

Work on building an emergency fund to cover life’s little curveballs and other unexpected expenses. Start tracking your spending, so you have a better idea of where your money is going. Build a realistic budget that prioritizes what you value and works within the confines of your current financial situation. Learn what triggers impulse purchases and try to avoid those situations.

If you’ve already made the mistake

The good news is that we can always learn from our mistakes. If you’ve fallen back into the debt cycle, there’s still time to learn from your mistakes, form better financial habits, and break the cycle. Now that you’ve made a mistake and felt all of the emotions attached to falling into debt again, you can use that pain to guide you and serve as motivation as you move towards freedom from your debt.