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2 potential risks of debt consolidation

January 25, 2012
By Karen Lawson

Debt consolidation loans, credit card balance transfers and home loans can streamline debt management and help you save on finance charges. But credit card debt consolidation is not an ultimate solution for carrying consumer debt, and can complicate financial matters if you don’t consider possible risks.

Debt consolidation risks depend on circumstances

Debt consolidation can offer a simple solution when you owe a couple of hundred dollars on each of several credit cards. In these cases, you can take out a debt consolidation loan from a credit union or bank, or transfer your balances to one credit card that offers a low introductory rate offer. If you pay off the balance before the introductory rate expires, your credit card debt problem is solved.

But if you’re dealing with thousands of dollars in consumer debt, you may need to consider refinancing your home or taking out a home equity line of credit (HELOC). But before putting your home on the line or making any other debt relief decisions, please consider risks associated with debt consolidation:

  • Falling back into old habits after debt consolidation. For those prone to impulsive spending, debt consolidation can lead to owing more debt. The “clean slate” created by transferring several debts to one account can provide a false sense of financial security; giving in to charging more than you can pay off in one billing cycle “just this once” can rapidly lead to owing new credit card debt in addition to your debt consolidation loan balance.
  • The risk of foreclosure. Increasing your home mortgage amount for paying off credit card debt can work if you have enough home equity, but defaulting on any type of home loan can lead to foreclosure.

As always, if your debt becomes too much to handle on your own, contacting a financial adviser or credit counseling service may be your best bet to find a sensible debt relief option.

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