Debt consolidation is a favorite amongst debtors trying to avoid bankruptcy
But there are some hidden dangers in debt consolidation that every debtor should know about:
- Canceling a card before you have transferred the balance to the consolidated loan can be costly. Some credit card issuers will punish debtors with fees or an increased interest rate if they cancel their card while they still have a balance. That’s why the timing of the transfer is important.
- Misinformation or misunderstanding the interest rate and fees for balance transfers. Some debtors trying to avoid bankruptcy with a “quick” debt consolidation rush into really bad deals. While their debt consolidation loan may boast of a low interest rate they may find that it is a teaser rate and/or there are steep fees for any transferred debt.
- Failing to maintain at least the minimum balance on credit cards while getting the debt consolidation program in place. Many debt consolidation firms give bad advice and debtors hoping to avoid bankruptcy with debt consolidation stop paying their credit cards because they figure they can just pay it later as part of their debt consolidation loan. However, what they don’t realize is that once they miss a payment the fees and interest rate shoot up.
- Using debt consolidation when you really should be in bankruptcy. As we have mentioned, many debtors get debt consolidation loans because they think it will help them avoid bankruptcy. But eventually, if they don’t have the income, they miss payments and end up in bankruptcy anyway and with a lot more debt. Debtors considering debt consolidation need explore their bankruptcy options before they sign the debt consolidation paperwork.