When Debt Consolidation Is A Bad Idea

When I first stumbled into the personal finance blogosphere, I was drowning in debt, but I didn’t know it yet. I had a job I loved at a little non-profit and a tiny apartment, but I was dealing with over $30,000 in student loans and was filling the gap with credit cards.

I was oblivious, but it seemed perfectly normal to me. Everyone I knew was struggling to get by or living it up with credit cards; I thought that’s just what you did.
I read some blogs, but none were particularly helpful, and some were downright ludicrous. This whole idea of cutting out lattes and magically becoming a millionaire seemed downright ridiculous, and paying down debt was simply overwhelming. Finance experts that made their own deodorant, dumpster-dived and foraged for dinner in the forest to reduce their expenses scared me, rather than inspired me.

Instead, I clung to stats that made me feel normal; the average U.S. household has over $13,000 in credit card debt, so I was in good company.

But while it was easy for me to dismiss the numbers, it was harder to shed the gnawing worry. No matter how many times I tried to minimize it, I still got queasy every time I got a bill, and I’d sometimes stay awake at night wondering how I was ever going to get out of debt. It took me a while to realize that it wasn’t normal and that
I was digging myself into a hole.

Like so many in denial, I looked at quick fixes.

The Lure of Loan Consolidation

Conveniently, my credit card company also offers consolidation loans and happened to send me a glossy pre-approval letter right when I was in a debt panic. All of my debts were rolled into one tidy little payment, and I’d have lower interest, too. It sounded like a dream come true. Like a doofus, I pulled out my phone and dialed their number right away. Within minutes, I was approved for a hefty consolidation loan, eliminating my debt and getting just one monthly payment to worry about. Eureka, right?

To say this was a poor life decision is putting it lightly.

Having just one debt, instead of three different accounts with balances, made me feel like I made progress overnight. Instead of seeing the total balance, I tricked myself into thinking I had somehow less debt now than before.

So despite having the exact same amount of debt, I changed nothing. I spent money on stupid stuff, bought unnecessary junk online, and before I knew it, I had new credit card debt on top of my consolidation balance too.

In a fit of financial responsibility, I listed all of my debts and nearly fainted when I realized I had almost doubled my debt load. For once, it shook me up. I owed more than my yearly salary. That was my wake-up call, and I finally made real change. I adopted the snowball method of debt repayment. I reduced my spending to the bare essentials, I did odd jobs on the side, and I applied every extra penny towards my debt. It took me a while, but I did get in control of my finances.

But while I was able to reverse the damage, it made me delay so many things I wanted to do. Vacations, buying a house, getting married….all of that was on hold until I could get my financial life together. Not a day went by where I didn’t kick myself for consolidating the original debt in the first place.

The Problem with Credit Card Consolidation

Since misery loves company, I spent some time researching debt consolidation, and I found I wasn’t the only one who was woefully confused. Consolidation seems like such a great idea at the time and I found hundreds like me who ended up in a worse situation.

Because debt consolidation doesn’t address the root causes of the debt issue; it only handles the symptoms. Without real change, you’re likely to end up in the same pickle to me and add to your debt burden.

Before You Take Out the Loan

Credit card consolidation isn’t the devil—at least for some people. If you are ready to make comprehensive changes, instead of frolicking around like I did, consolidation loans can be useful tools. But you need to be honest to yourself about your situation, how on earth you got into debt in the first place and what you can do to change it.

Before you sign that dotted line, consider:

• What caused my debt? Reflect on how your debt built up; was it due to a one-off emergency, or was it built over time with frivolous purchases? A sudden medical bill can catch anyone unaware, and it’s unlikely that will disrupt your expenses again. But if you have trouble reining in your shopping habit, consolidation loans can just worsen the problem.

• How long will it take me to pay this off? After consolidation, you should be able to pay off the debt within one to three years; living close to the bone is exhausting. If it looks like it will take longer than that, the debt loan can only get worse.
• Can I cut spending? To make consolidation work for you, you’ll have to cut expenses and improve your income. If you are not willing to cut out any extras or work extra shifts, consolidation will backfire.
• Is everyone on board? Debt is a family affair; everyone needs to be on the same plan to make repayment work. If you have family members who are resistant to changing their ways, consolidation is just a band-aid solution that will get worse later on.

When used strategically, consolidation loans can be a smart way to reduce your interest rates and get a handle on your debt. But for people like me, they become a stop-gap measure that exacerbates the problem. Reflect on your situation and build a plan before signing any loan agreements.