4 common debt consolidation mistakes

After consolidating a mountain of debt, you may feel like a weight has been lifted from your shoulders. You're no longer receiving warnings about missed deadlines, interest rates aren't compounding and your monthly payments are much more manageable. But don't be lulled into a false sense of security -- there are still many steps ahead in getting your finances under control.

"Debt consolidation is all about making one payment instead of several payments, but don't be misled because you're still deep in debt," says Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada.

In most cases, people who consolidate debt owe $10,000 to $15,000. If you don't consolidate wisely, you could end up in even worse shape. Watch out for these common mistakes.conlidation-mistakes

1. You don't stop to understand how you got there.
Debt repayment is akin to losing weight, says Laurie Campbell, executive director of Credit Canada. You need to be cognizant of how you got in your original situation so you can identify your triggers and vulnerabilities.

"We strongly recommend education and understanding what
happened going into it," Schwartz agrees. "Acknowledging how you
got into that position and what it's going to take to get out
of it is part of realistically dealing with your debt."

This might not be easy at first, as you celebrate your action in consolidating your debts. "It's mixed emotions because you feel liberated, but it's short-term," says Campbell.  If you fall back into old habits, you'll soon be feeling the desperation to repay again.

To stay on track, gather your old credit card and bank statements, receipts and bills so you can uncover what led to your debt.

"Notice patterns in your life -- do you go to the mall when you're stressed or do you spend too much on weekends out?" says Campbell. "All of these can lead to financial failure again."

2. You didn't do your homework.
You have a handful of options when you decide to consolidate your debt: a balance transfer credit card, a line of credit, a loan with the bank. You can even work with a non-profit credit counsellor to put together a debt repayment plan or talk to your creditor to work out a consumer proposal.

"There isn't a one-size-fits-all solution," says Schwartz. "Everybody has their own answer to paying down their debt."

But some consumers are too trigger-happy and choose one route without thoroughly considering its benefits and drawbacks. For instance, an offer such as a balance transfer card with a low interest rate may be enticing, but the fine print could outline upfront fees or a promotional period that's too short for you to clear the debt before the interest rate soars.

You must crunch numbers and do your research. Make a list of all of your outstanding debts and their interest rates. A student loan, with a fixed interest rate that's very low compared to credit card rates, doesn't need to be rolled into your consolidation, for example. A line of credit may be free to open but a balance transfer card may have a better interest rate.

If you'll need handholding throughout the process, a credit counsellor could broker a repayment plan and counsel you throughout your repayment. The counselling fees could be well worth the assistance.

3. You don't stop using your cards.
Just because you move the debt from one credit card to another, or pay it off with a loan, doesn't mean the debt disappears.

"There's some danger with [consolidating] if you're not great at managing money because you've freed up all this room on your credit cards [to spend more]," say Schwartz.

Both Schwartz and Campbell call for cutting up your cards post-consolidation to take away temptation, or at least hiding them. You don't have to cancel the cards, you just have to stop using them.

If you want to keep a card for emergencies or purchases that require plastic, Schwartz suggests using a secured card. It may have a low limit, but it works just like a conventional card, plus it's backed up by your security deposit, meaning you won't be able to spend more than you can afford.

4. You don't know how to attack the debt or who can help you.
A consolidated loan could take years to pay off. In some cases, there's a defined deadline -- Schwartz says if you work with a credit counsellor, you'll carve out a plan that works for both you and the creditor and involves you repaying the debt within three to five years.

If you've put your debt on a line of credit, however, the loan could go on for much longer. It's up to you to take initiative in tackling the lump sum.

Determining how much you should be allocating to debt repayment isn't an easy task. It takes budgeting, tracking your spending and making adjustments as life throws obstacles in your way.

 "It's a full-time commitment," Campbell says. "It's not as simple as setting up a debt consolidation and walking away."

It may be worthwhile to consult with a debt counsellor, Schwartz says. A professional may keep you accountable and help you tweak your budget. Otherwise, prepare to be self-disciplined and give the consolidated loan your full attention so you can pay it off and be debt-free.

See related: When paying less than your full card balance makes sense, How to find a good credit counselling agency
Published July 2, 2015

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