Common Debt Consolidation Pitfalls

Failing to weigh in small costs when completing a balance transfer. A common method of cutting costs is to transfer one’s credit card balances to a card with a lower interest rate. There may be many seemingly small costs associated with this however -- including monthly charges, annual charges, special balance transfer fees, cash advance fees, convenience fees, and overdraft fees -- that can make a balance transfer more expensive than it is worth.

Transferring credit card balances multiple times. Engaging in too many balance transfers can have a negative impact on your credit scores.

Paying off credit card debt only to continue using the card. Most people who continuously use credit cards that have been paid off end up charging large amounts of debt again – often even more than they charged the first time around.

Obtaining a loan or credit card while failing to prepare for an increased interest rate in the future. Some loans offer what has been called a “teaser rate”, an interest rate that starts off low but then increases in the future. If you will be able to pay off your debt soon and this situation works for you, then great. But be prepared and ready for that increase.

Making a late payment during the low-interest introductory period of a credit card. Many credit cards offer introductory periods during which the interest rate is very low or non-existent, but if you make even one late payment during this time then you can count on that rate rising significantly.

Mistaking “debt consolidation” with “debt consolidation loan”. Debt consolidation is an over-arching term that refers to various alternatives for debt relief, while a debt consolidation loan is a specific loan type that is used to pay off other debts and combine them all into one loan.

Obtaining a debt consolidation loan with a high up-front fee. Any lender who is worthy of having you as a borrower will charge either a low up-front fee, or none at all. In fact, charging a high fee initially might be an indication that the company in question is less-than-reputable.

Searching for the best loan without regard for the lender. One important aspect of finding the best loan for you is finding a great lender. Do not choose a loan until you are certain that the company offering it is trustworthy and professional.

Taking out a debt consolidation loan that is at a higher interest rate than you had previously. While consolidating one’s debt to simplify finances and to lower monthly payments can be a great debt relief option, agreeing to a higher interest rate in the process will result in your paying much more money in the long run.

Mistaking low payments with low interest rates on a debt consolidation loan. Just because your monthly payments may be lower with a debt consolidation loan than they were before you consolidated does not mean that you have a better interest rate. In actuality, your monthly payments might be lower simply because your repayment term has been extended. In this case, you will end up owing more in the long run.

Including an already low-interest loan in a debt consolidation. When you obtain a debt consolidation loan, there is no reason that you have to include all of your individual debts in that loan. Instead, leave out those debts that already have a low interest rate. It may not be as convenient to pay this bill separately, but it will pay off in the long run.

Obtaining a loan with a balloon payment for which you are unprepared. A loan that requires a balloon payment starts out with monthly payments, but after some specified period of time the entire remaining balance becomes due. If you have such a loan, then you need to start planning and saving immediately for that major expense.

Signing up for a debt consolidation plan with a company that makes too-good-to-be-true promises. Your debt can be eliminated neither quickly nor easily. Keep in mind that while debt settlement can work for you, you became obligated to pay your debt when you charged it up. Therefore, to reduce it or to eliminate it takes time and effort.

Agreeing to a repayment plan with monthly payments that you cannot realistically make. Sometimes when lenders are willing to negotiate an agreement on debts, borrowers are inclined to agree no matter what and regardless of their financial circumstances. Resist the urge to agree to a repayment plan just for the sake of coming to an agreement. If you doubt your ability to meet the payment requirements, then keep on negotiating.


Choosing a ‘non-profit’ or ‘Christian’ debt consolidation company based solely on its label. Even the most legitimate of non-profit and Christian organizations may not be any more affordable than their counterparts. And at worst, some companies have been known to call themselves non-profit or Christian just to lure in your business. In any case, compare companies based on their fees, their services, and recommendations, not on what they call themselves.

Working with a debt management company without confirming that payments are being made to your creditors. Even if you are making all of the payments on time from your end, your accounts could become delinquent if the company with which you are working fails to exercise the same diligence. Contact your creditors directly to be sure that the plan is running smoothly.

Thinking of a home equity loan as a quick fix without really thinking. Obtaining a home equity loan to free up cash can be a great way to pay down debts, but only if you can afford it. A home equity loan is not a good option if you cannot realistically afford the payments.

Not comparing the costs of a home equity loan, home equity line or refinance to the benefits. Consider the costs to you – including appraisal fees, title insurance, and origination fees – before taking out a home-based loan to be sure that it is worth it for your purposes.

Securing a loan against collateral when you are not sure that you can afford the payments. No matter how important it is for you to obtain a loan, you do not want to do so at the very real risk of losing your home or other valuable property. If you are unsure of your ability to make payments, then do not put your property in jeopardy.

Obtaining a personal loan with a very high interest rate. Personal loans can be wonderful loan sources, particularly for borrowers with good credit. Sometimes attached interest rates can be very high, however, especially for borrowers who have bad credit. If you are offered a rate that is very high, then you might consider seeking out a secured loan instead.