Debt Consolidation Tricks and Traps

Debt Consolidation Trap 1

Balance Transfer- If you have credit card debt, balance transfer can look like a tempting debt consolidation option.   Understand that any new purchase on the new card will attract full interest, and any payments you make go on this new debt first, not on the old debt.  There will be a fee for this service, generally 1% of the full balance of the debt.  After 12 months the low interest rate reverts to the standard variable rate and you’re back to where you were.  There may also be exit fees if you leave.

Debt Consolidation Trap 2

Ghost Debt – After the debt is consolidated the debts are not automatically closed.  These ghost debts can come back to haunt you.  They continue to accrue fees and charges.  Worse still, many people will use these debts for unexpected expenses.  After a couple of years of unexpected expenses you may end up with more debt.

Debt Consolidation Trap 3

Low Monthly Repayment/Long Terms – Lower repayments mean one of two things, lower interest or a longer term.  If the term is longer the repayments may end up being greater.  This is especially true of consolidating debt into home loans through refinancing.