• Skip to primary navigation
  • Skip to main content
Good Financial Cents®
Content is based on in-depth research & analysis. Opinions are our own. We may earn a commission when you click or make a purchase from links on our site. Learn more.
  • Make Money
    • Get Money Now
      • Ultimate Guide to Making Money
      • Need Money Now
      • Get Free Money Fast
      • Make Money Fast
      • Make $1K Per Month
      • Make $100 Per Day
    • Control Your Destiny
      • Self Employed Jobs
      • Make Money from Home
      • Hobbies That Make Money
      • How to Become a Freelance Writer
      • Small Business Ideas to Start
      • How to Become an Independent Contractor
      • Best Online Jobs
    • Passive Income
      • Passive Income Ideas
      • Multiple Streams of Income
      • Extra Income
      • Residual Income Ideas
      • Learn to Sell e-Books
      • Make Money on Facebook
      • Make Money on Tiktok
      • Best Online Survey Sites to Make Money
    • Explore More
      • Best Side Hustle Ideas
      • Make Money for Teens
      • Best Online Colleges
      • Best Jobs No College Degree
      • Become a Millionaire
      • Careers for the Future
  • Manage Money
    • Best Of
      • Budgeting Tools
      • Personal Finance Software
      • Best Cashback Cards
    • Company Reviews
      • Personal Capital vs Mint
      • Personal Capital Review
      • SmartAsset Review
    • Guides
      • Buy or Lease a Car
      • What is Liquid Net Worth?
      • Setting Financial Goals
      • How to Budget
      • Ways to Save Money
    • Explore More
      • How Much Car Can I Afford?
      • Best Auto Refinance Companies
  • Invest
    • Best Of
      • Best Short and Long-Term Investments
      • Best Low Risk Investments
      • Best Online Stock Brokers
      • Best Crypto Exchanges
      • Best Short Term Investments
      • Best Long Term Investments
      • Best Trading Platforms
      • Best Investment Apps
    • Company Reviews
      • Lending Club
      • Robinhood
      • M1 Finance
      • Ally
      • TD Ameritrade
      • Fundrise
      • Betterment
      • Etrade
      • Wealthfront
    • Guides
      • Investing for Beginners
      • Investing Small Amounts of Money
      • Investing in Real Estate
      • No Money Down Real Estate
      • Bonds vs Stocks
      • Peer to Peer Lending
      • Best Hedges Against Inflation
      • Safe Bitcoin Investing in 2023
    • Explore More
      • Bitcoin vs. Real Estate
      • Betterment vs Wealthfront
      • Investing for College Students
      • Stock Market Alternatives
    • By Investment Amount
      • How to Invest $100
      • How to Invest $1K
      • How to Invest $2k-$3k
      • How to Invest $5K
      • How to Invest $10K
      • How to Invest $15k
      • How to Invest $20K
      • How to Invest $30k
      • How to Invest $50K
      • How to Invest $100K
      • How to Invest $200K
      • How to Invest $500K
      • How to Invest $1M
  • Taxes
    • Best Of
      • Best Tax Relief Companies
      • Best Tax Software
    • Guides
      • Federal Income Tax Guide 2023
      • Taxes and Cryptocurrency
      • How to Do Your Own Taxes
      • How to Invest Your Tax Refund
      • Hiring a Professional Tax Preparer
      • Tax Tips for Freelancers
    • Company Reviews
      • TurboTax Review
      • H&R Block Review
      • Taxslayer
      • Tax Act
  • Insurance
    • Best Of
      • Best Life Insurance
      • Best Home Insurance
      • Best Auto Insurance
      • Cheap Term Life Insurance
      • Car Insurance For Young Adults
    • Guides
      • Term vs Whole Life
      • Different Types of Car Insurance
      • Average Cost of Car Insurance
    • Explore More
      • Life Insurance Over 50
      • Life Insurance Over 80
      • $1 Million Life Insurance
      • $2 Million Life Insurance
      • $3 Million Life Insurance
    • Company Reviews
      • Banner Life Insurance
      • Ladder Life Insurance
      • Health IQ
      • Haven Life
      • Policygenius
      • State Farm Auto Insurance Review
  • Retirement
    • Roth IRA
      • Best Places to Open a Roth IRA
      • Best Investments for Roth IRA
      • 7 Roth IRA Secrets
      • Roth IRA Conversion Guide
      • Roth IRA Rules
      • Roth IRA vs Roth 401k
      • Are Roth IRA Contributions Tax Deductible?
    • 401(k)
      • 401(k) Limits
      • 401(k) to Roth Rollover
      • Is 401(k) Enough for Retirement?
      • Maxed Out 401(k): What's next?
    • Traditional IRA
      • Traditional IRA Rules and Limits
      • Traditional IRA vs. 401(k)
      • Simple IRA Rules
      • SEP IRA Rules
      • How Much Do You Need to Start an IRA?
    • Explore More
      • SEP IRA vs. Roth IRA
      • 457 Plan for Successful Retirement
      • 401a Rollover Rules
      • How to Retire at 50
      • How to Retire at 55
  • Banking
    • Best Of
      • Best National Banks
      • Best High-Yield Savings Accounts
      • Best Checking Accounts
      • Best Savings Accounts
      • Best CD Rates
      • Best Money Market Accounts
    • Company Reviews
      • BBVA
      • Synchrony
      • Wells Fargo
    • Explore More
      • 9 Banking Alternatives for 2023
      • What is a Credit Union?
  • Home
    • Best Of
      • Best Mortgage Lenders
      • Best Mortgage Refinance Companies
      • Best Home Warranties
      • Best Homeowners Insurance
      • Best VA Loans
      • Best Mortgage Rates
      • Best Moving Companies
      • Best Home Security
    • Guides
      • Home Buying Checklist
      • Online Home Appraisal
      • How Much House Can I Afford?
      • First-time Homebuyer Programs
      • How to Get Approved for a Home Loan
      • Save Money When Building a House
      • How to Save for a Downpayment
      • When to Refinance Your Mortgage
    • Explore More
      • 15 vs. 30-year Mortgage
      • Home Warranty vs. Home Insurance
      • Veterans United Home Loan Review
      • Quicken Loans Review
      • HELOC vs Second Mortgage
      • DCU Mortgage Review
      • Costco Mortgage Program Review
      • USAA Mortgage Loan Review
  • Credit
    • Best Of
      • Best Credit Repair Companies
      • Best ID Theft Protection Services
      • Best Credit Report Options
      • Best Bad Credit Loans
    • Guides
      • How to Build Your Credit Score
      • How to Raise Your Credit Score in 5 Months
      • How to Dispute Your Credit Report
      • Hot to Remove Collections from Your Credit Reports
      • How Identity Theft Destroys Your Credit Score
    • Explore More
      • What is a Good Credit Score?
      • What is a Bad Credit Score?
  • Debt
    • Best Of
      • Best Debt Consolidation Loans
      • Best Personal Loans
      • Best Student Loans
      • Best Student Loan Refinance
    • Guides
      • What is Debt Consolidation?
      • How to Get Out of Debt
      • How to Get a Personal Loan Approved
      • How to Pay Off Student Loans Faster
      • Should I Consolidate My Debts?
      • Should I File for Bankruptcy?
    • Company Reviews
      • Credible
      • Sofi

Avoid these 3 Pitfalls of Debt Consolidation

https://secure.gravatar.com/avatar/e878b08dfe07ff62f455e703bd7b6342?s=100&d=mm&r=g
  • Written By:
    Miranda Marquit

    Miranda Marquit

    Miranda writes for several web sites and specializes topics related to finance, investing, and entrepreneurship. She has been mentioned in...

    Read More
  • Updated: September 7, 2021
  • 3 Min Read
  • Advertising Disclosure

    Advertising Disclosure

    GoodFinancialCents® has an advertising relationship with the companies included on this page. All of our content is based on objective analysis, and the opinions are our own. For more information, please check out our full disclaimer and complete list of partners.

Quality Verified THE GFC® PROMISE
shield check icon
Quality Verified

GoodFinancialCents® partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

shield check icon
Why You Can Trust GoodFinancialCents®

GoodFinancialCents® partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

debt consolidationOne of the best things you can do for your finances is to pay down debt. There are a number of different strategies designed to help you get rid of your debt.

Among the more popular strategies is debt consolidation. With debt consolidation, you gather all your debts in one place.

You can get a debt consolidation loan that pays off all the smaller loans and leaves you with the larger loan, or you can manage your debt consolidation through a third party, which collects payment from you and then disburses it to your creditors.

Debt consolidation can be a great way for some consumers to put a solid dent in their debt. This is because it gets all of the debt in one place, where it can be easily managed. You only have one payment to worry about, and one interest rate. Being able to concentrate your efforts can go a long way toward getting rid of debt.

However, debt consolidation isn’t for everyone, and it’s no guarantee that you will be able to get rid of your debt effectively — especially if you fall prey to the following 3 pitfalls:

1. Using Your Freed-Up Lines of Credit

If you get a debt consolidation loan, the result is more freedom in terms of lines of credit. You paid off your credit card balances with the debt consolidation loan, so now you have fully available credit cards.

Many consumers start using these credit cards again as soon as the debt consolidation process is complete. This can be a huge mistake. Savvy use of credit cards with 0 APR can be helpful, but you have to pay off the balances each month in order to avoid high interest charges. If you continue to use your credit cards and carry balances, you will rack up even more debt than you had to begin with.

Don’t use your freed-up lines of credit unless you are done paying off your debt consolidation loan, and your spending is under control so that you aren’t living beyond your means.  I worked with one person who borrowed money using Lending Club to pay off all their high interest debt.  18 months later they had double the debt and no way to consolidate.  Don’t be this person!

2. Failure to Change Your Spending Habits

If you aren’t planning to completely change your spending habits, debt consolidation — in any form — isn’t going to help you. You need to stop thinking of debt as the problem.

In most cases, debt isn’t the problem; it’s a symptom of your spending problem.

You can pay off debt time and time again, but unless you change your current habits, and make a fundamental shift in the way you approach your money, you will end up back in debt. The more times you go through the debt cycle, the more interest you pay. This eats into your ability to build wealth over the long haul.

If you want to really make your debt consolidation effort a success, your plan has to be accompanied by fundamental changes in the way you handle your money.

3. Using Debt Settlement Instead of Debt Consolidation

A third-part company can help you organize your debt, and pay it off quickly through a form of consolidation. Properly certified credit counselors can help you create and execute a pay down plan. You make one payment, and the company handles all of the transactions. You will be charged a fee for the service, but for some consumers, this fee amounts to less than they would have paid in interest had they continued struggling with a debt pay off plan on their own.

What you have to watch out for are companies that actually involve you in debt settlement rather than debt consolidation. With debt settlement, you make regular payments to the company, and the money is held in an account. The company withholds payment from your creditors. After a time, your creditors are willing to settle for a lump sum payment that is less than what you owe. The money you have been paying into an account is used to settle with your creditors.

However, this process takes a very large toll on your credit. As long as you keep making payments on time, your debt consolidation efforts won’t likely have a huge impact on your credit score (although your credit utilization will remain high). Go through debt settlement, though, and your payment history — the largest factor in determining your score — will be destroyed.

Editor’s note: For some people ruining their credit for the sake of finally getting out of debt is a small price to pay. Your credit can always come back if you’re smart on how you manage you’re money going forward.

Before you agree to allowing a third party to handle your debt consolidation, make sure you understand what it entails, and that you truly understand the process.

Save

Save

Facebook LinkedIn Twitter

About the Author

Miranda writes for several web sites and specializes topics related to finance, investing, and entrepreneurship. She has been mentioned in numerous media. Her blog is Planting Money Seeds

You Might Also Enjoy

7 Questions to Ask Yourself Before You Refinance Student Loans

7 Questions to Ask Yourself Before You Refinance Student Loans

Best Bad Credit Loans: 6 Lenders to Get Approved

Best Bad Credit Loans: 6 Lenders to Get Approved

The 7 Best Student Loans for 2023

The 7 Best Student Loans for 2023

What is Debt Consolidation and How Does it Work?

What is Debt Consolidation and How Does it Work?

9 Best Personal Loans of December 2023

9 Best Personal Loans of December 2023

10 Best Debt Consolidation Loans for December 2023

10 Best Debt Consolidation Loans for December 2023

3 Comments

  1. Anton Ivanov | Dreams Cash True May 6, 2013

    I think it’s no surprise that the first two pitfalls focus on changing your financial habits. With enough time and determination anyone is likely to pay off their debts, but so many just dig a new hole for themselves because they never took the time to fix what is wrong – their financial habits. If one can master those, then debt will never become a problem again!

    Reply
  2. Tom Gorski May 5, 2013

    Very useful tips shared.. The detailed explanation of debt settlement is something which i have found the most useful here.. I think being thrifty is the way to go till the entire debt is paid off.. no matter in whatever situation you are as a borrower!

    Reply
  3. Mike Craig May 3, 2013

    As always great tips. Getting debt under control is like a war that you must win. Defeat isn’t an option.
    One avenue for the debt consolidation loan might be Peer 2 Peer lender like Lending Club or Prosper. Once you get the debt monster under control, start the emergency savings plan. By the way down the line Lending Club and prosper are good places to invest as well

    Reply

Leave a Reply

Cancel reply

  • Make Money
  • Manage Money
  • Invest
  • Taxes
  • Insurance
  • Retirement
  • Banking
  • Home
  • Credit
  • Debt
  • About
  • Contact
  • Facebook LinkedIn Twitter

© 2023 Good Financial Cents®. All Rights Reserved. | Privacy Policy | Disclaimer

All written content on this site is for information purposes only. Opinions expressed herein are solely those of AWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

All third party trademarks, including logos and icons, referenced in this website, are the property of their respective owners. Unless otherwise indicated, the use of third party trademarks herein does not imply or indicate any relationship, sponsorship, or endorsement between Good Financial Cents® and the owners of those trademarks. Any reference in this website to third party trademarks is to identify the corresponding third party goods and/or services.