Debt consolidation is a resourceful way of lowering debt payment obligations, reigning in interest rates and getting on the path to financial freedom. However, when used incorrectly, consolidating debt can lead to even more financial troubles and even personal bankruptcy. If you are considering consolidating your bills, don’t make some of the most common debt consolidation mistakes.
Taking High Interest Rate Debt Consolidation Loans
Many people who have high debts to consolidate also have a less-than-perfect credit record. If your score is too low, you may only qualify for high interest rate loans. Before accepting money from a lender, find out what types of fees are associated with the loan, as well as how much money you will pay in interest over the life of the loan. Consolidating with a rate higher than your credit card and other existing debt interest rates is counter-productive.
Failure to Change Spending Habits
If you are in debt as a result of living beyond your means, you must change your spending habits after acquiring a consolidation loan. Those who fail to do so often go even deeper into debt, as freshly paid-off debt balances can give the illusion of immediate financial freedom. Instead, stop charging new purchases and start using your money to pay down outstanding balances.
Your credit score is one of the most important factors lenders look at when you apply for a loan or credit card. Getting a higher score is one of the best ways to secure a lower interest rate and better terms when you borrow money.
Your credit score is based completely on the information contained on your credit report. In fact, you have three separate credit reports, and therefore, a separate credit score based on each report. The credit bureaus gather information that’s compiled on your credit report. This information includes each of your loans and credit lines, when they were opened, how much you initially borrowed, and what you owe now. In addition, your report lists the amount of your monthly payment and any late payments you’ve made.
Other sections of your credit report show negative information on file beyond your late payments. Collection accounts appear on your credit report and lower your credit score, even if they’re paid off now. Public records for things like bankruptcy, foreclosure, tax liens, and financial judgments against you also show up on your credit report.