Is Debt Consolidation a Good Idea?

Perhaps you are like many people in our current uncertain economy—you have a sizeable sum on your major credit card bill due on the first of each month, another credit card bill due on the 10th, your medical credit card due on the 12th, then there’s your Target card (for the kid’s school clothes), your gas credit card, and probably a few more credit card companies you owe money to as well. When you are also paying your mortgage or rent, your utilities, the cable and Internet bills, insurance, and possibly student loan repayment, your monthly bills can be overwhelming.

Secured vs. Unsecured

An example of a secured loan is your mortgage or your car loan; you pledge that asset to secure the repayment of your loan. If you fail to make your payments, your car or home can be repossessed or foreclosed. You may also be able to acquire a secured loan by borrowing against your life insurance or retirement plan. An unsecured debt consolidation loan does not put your house, car, or retirement at risk, but usually requires the borrower to have fairly good credit—and the interest rates will be significantly higher.

How to Decide Whether Debt Consolidation is For You

If you feel as though you are drowning in debt, the idea of debt consolidation can be appealing. After all, how could simplifying your finances and reducing the number of payments you are required to make each month be a bad thing? Before you sign on the dotted line for debt consolidation, it’s important that you understand the process. Debt consolidation exists because it is beneficial to lenders and can be beneficial to consumers; however, if you fall into any of the following categories, debt consolidation may not be the best way for you to go.

  • You have no intention of changing your spending habits. If you use the extra money you free up through debt consolidation to continue to buy what you want instead of only what you cannot live without, you will find yourself back in the same situation very quickly.
  • Debt consolidation places your home in jeopardy. The most popular form of debt consolidation centers on refinancing your home. If you fail to pay your credit cards, they will go into default and your credit will nose-dive. If you fail to pay your mortgage, you could find yourself without a home. Which is worse?
  • You don’t want your credit score to suffer. Debt consolidation will almost always lower your credit score—at least temporarily. If you currently have a good credit score and can at least manage your monthly payments, debt consolidation might not be beneficial. If you do go with debt consolidation, and turn into a very thrifty person who puts every spare penny toward your debt, your credit score will gradually increase.

What About Transferring One Credit Card Balance to Another Credit Card?

You might consider transferring a credit card balance with a high interest rate to a card with a lower rate as a way to consolidate debt; however, you must be very disciplined in your approach and must read the fine print carefully. You don’t want to end up getting stuck with a balance at a higher interest rate after your introductory period. Simply moving debt around should not be your ultimate goal, rather your goal should be to pay off balances, free up cash flow, and build strong credit.

Getting Help to Make This Important Decision

Before you make the decision to consolidate your debt, it could be time to speak to a knowledgeable Northern Virginia bankruptcy attorney to determine if filing for bankruptcy could be a better option. Of course your specific situation will dictate whether bankruptcy, debt consolidation or another option might be the best solution for your financial problems. Yet for many, bankruptcy is a better option than debt consolidation.

Contact Northern Virginia Bankruptcy Attorneys

At Tyler, Bartl & Ramsdell, P.L.C., we know how hard it is to get out of debt. That’s why we offer our legal services to all individuals and businesses that are looking to get out of debt the right way—while still maintaining good credit scores.

For over 25 years Tyler, Bartl & Ramsdell, P.L.C. has helped thousands of individuals and businesses find freedom from crushing financial debt. Call today for a free consultation at (703) 549-5000 or fill out our confidential contact form.