Debt consolidation is a type of refinancing that consumers can use to pay off their other debts. As we’ve written before, debt consolidation generally means collecting several debts, such as medical bills or personal loans, into one loan payment and paying it off. This can be done in a number of ways, such as taking out a debt consolidation loan, transferring your debt to a low-interest credit card or enrolling in a debt repayment plan. Another option is to work with a credit card debt consolidation company. Some of these are legitimate, according to the Consumer Financial Protection Bureau, however, others may not have your best interests at heart. “If you are thinking about debt consolidation, you might first want to consult a nonprofit credit counselor,” the agency notes.
Here, we’ve outlined a few of the issues you might run into when trying to consolidate your debt.
1. Forgetting to Pay Minimum Card Payments
As the CFPB notes, many credit card companies offer introductory or special financing that allows consumers to consolidate their debt onto one account. When consolidating your credit card balances onto a new card, you won’t want to forget to pay at least the minimum payment on each of your credit cards. Also, it may take up to two weeks to process a balance transfer, so if you don’t make the minimum payment on each of your cards, you could be charged late fees and the late payment will appear on your credit report. (You can see how late payments are affecting your credit by viewing two of your credit scores, updated every 14 days, for free on Credit.com.)
When a balance transfer goes through, you’ll want to double-check the balance on each of your credit cards. If it states anything other than zero, you’ll need to make a payment by your due date or — you guessed it — be charged with another late fee. Remember, late fees can have a serious impact on your credit score, so it never hurts to set a reminder or enroll in auto-pay.
2. Applying for Several Loans at the Same Time
If you think you’re being a smart shopper by applying for several consolidation loans at the same time, think again. Every application for a personal loan triggers an inquiry into your credit history, and each inquiry lowers your credit scores a little bit. Apply for several debt consolidation loans at the same time, and your credit scores could really drop.
It’s a good idea to begin your loan search by checking your credit scores so you know where your finances stand. Next, ask a potential lender about the minimum credit score required to qualify for a loan. Some lenders will list this information on their websites. Once you’ve studied the credit requirements, it’s a good idea to choose one that will work with your credit history.
3. Falling for an Online Debt Consolidation Scam
There are plenty of scam artists posing as online lenders, offering consolidation loans to people with little or damaged credit. These sites may charge upfront fees or ask for several months of payment in advance. It’s wise to only apply for loans from lenders you trust.
If you find a good online deal for a consolidation loan, be sure to check the background of the company rigorously. Check to see if a lender is registered to do business in your state (legitimate lenders are) by contacting your state attorney general’s office or your state’s Department of Banking or Financial Regulation. You can also check with the Better Business Bureau. Does this lender have a slew of complaints filed against them? If so, you’ll want to take your loan business elsewhere.
This article has been updated. It was originally published January 9, 2014.