How to Avoid Debt Consolidation Traps


What is Debt Consolidation?

Debt consolidation is a debt restructuring process that involves taking up a loan to repay all or most pre-existing loans and debts. Many individuals wound in debt often run to debt consolidation to simplify the repayment process or to reduce the debt. Unfortunately, even individuals capable of repaying their debts sign up for debt consolidation programs.

You should only get into a debt consolidation program when you are certain that it is your only option and the only way you can afford to repay debt. Instead of running to a debt consolidation agency, make financial management your personal ‘Do-it-Yourself’ project.


1. Review your debt statements.

Gather all your recent debt statements including your credit card debts, car payments, student loans, and medical billing statements. Get the accurate value or every debt or the amount owed by using Excel spreadsheets. List all the outstanding debt items, their interest rates, monthly repayment amount, and the creditor’s contact information.

2. Make enquiries for zero-interest balance transfers

Credit card debts from high interest cards are the hardest to deal with and should be dealt with promptly. Before rushing for a debt consolidation program, contact the credit card company and ask them to sign you up for a new credit card with a zero-interest balance transfer on it. The zero-interest period is about a year or 18 months in some cases. Although this time may not be sufficient for you to have cleared off the debt, you will have made great leaps towards debt freedom

3. Negotiate with your lenders

You have to be honest about your situation. Explain to your creditors that you are facing financial difficulties and you are in need of lower monthly repayments on debt owed. This will be tough, buttery, it is worth the trouble.

If you are in a precarious situation, explain this and let the creditor know that you are at the brink of filing for bankruptcy. In case of unsecured debts, the creditor will risk losing everything if they don’t revise your repayment schedule. You may also consider mentioning that your credit score is low. These strategies should help you get more affordable repayment schedules from your creditors.

4.Debt management

Debt consolidation isn’t the only debt reduction process. You can still save your credit score and repay all your debts if you plan your finances effectively. In case of multiple and often forgotten repayments, set up a direct debit account with your bank. This will help in raising your credit score by ensuring that every debt is repaid in time.

Organize your finances and cut out any unnecessary expenses. You can live without most of your monthly expenses. Use the money you saved money to pay off more debts.

Find a way of earning more, especially if you are unable to cut down expenses. An extra income can go into your savings account and you can use some of it to to pay off your debt.

5. Implement the snowball effect

Lower your credit card balances by paying off all small debts first. Alternatively, you may consider paying off all the high interest balances first. Either way, you will reduce the debt owed without having to take a debt consolidation loan.

6.Take a home equity loan or line of credit

If you are totally unable to repay the debts, but have good credit and a partially paid off mortgage, mortgage refinancing or a home equity loan should be considered. Ensure that you are able to repay the new loan since your home is used as collateral.


• Can you handle your debts? If you are in a position to repay all your debts but forget some bills, create a direct debit account through which all your debts will be repaid from automatically every month.

• Don’t fall for scams. Research! Avoid the highly aggressive sales agents or sites that ask for deposits upfront. Evaluate the benefits of a debt consolidation program before signing up.

• Debt consolidation loans should be affordable. Research and correctly calculate the amount that will be saved from a debt consolidation program. If the lower monthly repayments result in a loan that is more expensive than the value of your current debts, abandon that option and keep shopping.

• Live within your means. Spend on what you can afford and stop falling into pressure from your friends. Live in an affordable house and take advantage of sales from all stores. If your income reduces, move into a smaller house or rent out the guest room.

• The best debt consolidation programs lack prepayment penalties. If debt consolidation is your only option, read the fine print and avoid programs with prepayment penalties.

• Set a budget and determine the amount that you can repay comfortably monthly. By reducing expenses and earning a little extra from your side hustle, you will be able to repay your debts every month with ease.

• Avoid using credit cards. Shop with cash at hand and always leave your credit cards at home.


• Do not take a debt consolidation loan to get rid of your problems. Being in debt means that you have deeper issues. Before taking the loan, get rid of multiple and unnecessary credit cards. You should also resolve not to live just to keep up appearances. Be yourself and lead a lifestyle you can afford.

• Have a savings account. An emergency fund or a savings deposit account is important. The reason you are deep in debt is the lack of an alternative. Savings get you through rainy days without debt. Do not pay off debt without saving some dollars.

• Not every debt can be consolidated. Debts with high interest rates even in debt consolidation schedules shouldn’t be consolidated.

• Avoid unscrupulous experts. If you trust the wrong person with your debt issues, you will end up consolidating when you could have repaid your debt through debt management. Talk to your banker or credit counsellor for information on the best option.

• Do not settle for ANY debt repayment plan. Have a solid repayment plan for all your debts. A budget will guide you in determining the amount of money that you can afford to repay every month.

• Do not put your house in danger. You may lose your home if you default payments.

Author Bio

Isabella Rossellini is a business credit counsellor with experience in debt management and debt consolidation. As a business writer, he analyzes loans and credit management. Learn more on his debt consolidation loan made easy blog.