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Three bad debt-consolidation moves:
1) The Hard-Money Loan.
The biggest myth about debt-consolidation loans is that they're easy to get. If you really need a loan, it's probably because you've already missed a few payments and your credit history has more dings in it than a '74 Ford Pinto.
And that's the problem. If you are a credit risk, the consolidator may entice you with promises of an easy-does-it loan, and end up charging you higher interest rates than you're paying now -- as high as 21% or 22%. Your monthly payment may be lower with one of these loans, but you'll end up paying more.
2) Debt Consolidators Who Promise to Take Care of Everything.
This is the fairy godmother fantasy. This Nice Big Debt Consolidation company comes along and swears they'll make your life soooo much easier. They'll negotiate lower interest rates, reduce your monthly payments -- and all you have to do is make "one EZ payment."
In reality, many debt consolidators build in a fee as part of the monthly payment you make to them. It's usually about 10% of the payment (i.e. about $40 on a $400 monthly payment). They pass along your payments to the creditor -- some debit directly from your checking account -- and get back a 10% to 15% slice that the relieved creditor is only too happy to rebate to the consolidator.
Is it worth paying someone else to do what you can do on your own, i.e. negotiate lower interest rates and stretch out your repayment schedule and pay off the highest-interest debts first?
To desperate ears, this might sound like an ideal solution, especially when you talk to these people and they scare the bejeezus out of you.
Here's another risk with consolidators you should know about: they have been known, in some cases, to make late payments or even miss payments, thus worsening your plight (and your credit record).
Is it worth paying someone else to do what you can do on your own? That is, negotiate lower interest rates and stretch out your repayment schedule and pay off the highest-interest debts first? I don't think so.
3) The Balance Transfer Trap.
Low-interest balance-transfer cards are a dime a dozen these days, but remember that those rates only last a few months -- and then you have to switch cards again. The danger is that at some point all this activity begins to show up on your credit report, and you start to look like a bad risk. Then if you get turned down, you could be left holding the high-interest card you were hoping to dump.
If you think you can swing from the balance-transfer vines for a few months, just make sure you formally close all your accounts yourself, and then notify the credit-card company to mark the account closed at customer's request. Otherwise, on your credit report, it will look like the creditor closed your account. Thus making you look like an even worse risk, even when you're doing your best not to be.
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THE WORST MOVES
