By Michael Rupured


University of Georgia

All you have to do is turn on the nearest television or radio to
hear advertisements targeted to people who have bad credit or too
much debt. The thing to remember is that each of these agencies
is providing a service to make a profit, not to help you get out
of debt.

These companies offer to provide a range of goods and services,
from copies of your credit report to relief from creditors. Some
of them even offer to fix your credit report altogether. It’s
wise to know which are legitimate offers because when it comes to
your credit, there are plenty of offers out there that aren’t.

One payment, but higher interest

One service that you hear a lot about is debt consolidation. Some
companies that frequently advertise themselves as credit
assistance agencies are in truth debt consolidation lenders.
Instead of helping you develop a payment plan to get out of debt,
they encourage you to take out another loan, which will pay off
all of your credit card balances.

The sales pitch usually emphasizes that instead of making a lot
of payments to a lot of creditors, you’ll have only one monthly
payment to make. However, the sales pitch does not tell you that
you’ll usually pay a very high interest rate (not to mention
miscellaneous fees) for this kind of loan. It also doesn’t tell
you how much longer you’ll stay in debt – typically, at least
five years.

But don’t despair. It is possible to get a good deal on a
consolidation loan, especially if you own your home. Most
financial institutions offer home equity loans, in which you
borrow against the equity you have in your house. The advantage
to a home equity loan is that the interest is tax deductible
which is not the case with credit card debt.

Don’t trade unsecured debt for secured debt

However, the risk of borrowing against your home equity is
that you’re trading
unsecured debt (credit cards) for secured debt, which is subject
to foreclosure or repossession. If your circumstances change and
you can’t pay, you could lose your home.

In addition, many people do not have the discipline to stop using
their credit cards once they’re paid off. This means that in
addition to having a debt consolidation loan balance to repay
(regardless of what type of loan it is), without discipline, you
could go out and run up your credit card balances all over again.

If you truly want to get out of debt, it’s probably best to leave
debt consolidation loans alone. If borrowing is your problem,
borrowing more isn’t the solution!