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How to avoid the traps of debt consolidation, could leave you worse off

How to avoid the traps of debt consolidation, could leave you worse off

How to avoid the traps of debt consolidation. Image: Pixabay

If you’re finances are spiralling out of control, the obvious thing to do is to consolidate your debts.

Bundling together all of your credit cards, store cards, lines of credit, and personal loans has a lot of potential benefits – you can streamline your affairs, an most likely reduce the fees and charges that you’re paying.

However there are some pitfalls with the debt consolidation process, if you’re not careful a debt consolidation could leave you worse off than before.

If you’ve got yourself into a precarious financial position, and debt consolidation is recommended as a way to simplify things, it’s important to also think about the underlying causes that have brought you to this point in the first place. Are you spending more than you’re earning? Do you need help in budgeting or managing your money? If you simply just consolidate your debts without addressing the underlying causes, in no time you could find yourself right back where you started.

Here are some of the common debt consolidation pitfalls to watch out for:

You haven’t addressed the root of the problem

Seek independent financial advice to better understand what were the circumstances that led you to needing financial help. Ensure that you identify how can you change your circumstances so you don’t repeat the same mistakes.

You haven’t done your research

Debt consolidation comes in all shapes and sizes. Seek independent financial advice and ensure that you have considered all of your options. Make sure that you compare the fees and charges of the different products you are considering, this will help to ensure that you’re getting the best deal and actually saving money in the process.

You choose the wrong debts to consolidate

This is where independent financial advice is important. Only refinance and consolidate the debts that will help you to materially improve your financial position. For example, if you’ve got low-interest credit card accounts, it would be a mistake to consolidate these into a new credit facility that has a higher interest rate.

You choose the wrong person to advise you

There’s lots of payday loan companies and other debt management agencies who will be seeing to use your precarious financial position to sell you high-interest products that actually put you in a worse position. You need independent financial advice who can help you navigate through the confusing options.

You don’t control your spending

Your debt consolidation may leave you feeling like you’ve suddenly got a lot more disposable income. You need to exercise restraint, don’t spend the additional money that you now have, you need to use this to strengthen your overall financial position.

You don’t plan for your future

What is your financial plan? What are you saving for? What sort of financial position do you want to be in five years from now? Seek professional advice to help ensure that you have a manageable and achievable financial plan for your future.