Debt Consolidation: A Look from the Other End

Debt consolidation has consequences, good and bad. Make sure that you know what to expect before you proceed.

You could ask the psychic at the county fair how your debt consolidation loan will turn out, but it's not likely to prepare you for what's ahead. Here's a look at some of the possible consequences of debt consolidation; it's about the closest you'll get to a crystal ball.

Credit score slide

Right off the bat, you should know that funding a debt consolidation loan may adversely affect your credit score and your ability to obtain credit. This won't be a permanent change, and should not be viewed as anything catastrophic. If you're prevented from getting easy credit for a while, so be it-you're better off. You don't need the distraction when you're in the early stages of debt pay down. Remember, too, that your credit score probably took a noticeable hit before you even thought about consolidating. Maxed out revolving charge accounts and missed minimum payments are not treated kindly by the FICO credit score formula.

While there's lots of advice available on how to rebuild your credit score, you don't need to take any specific actions in this regard. Just stay focused on eliminating your debt, and make your payments on time. Your score will rebound naturally.

Emotional upside

Stress reduction is one of the positive outcomes of debt consolidation. Think about your situation now. Are you anxious over making minimum payments? Are you juggling balance transfers so that you can afford to pay your rent? Have you watched your account balances go up due to high interest charges and late fees?

A properly structured debt consolidation loan relieves the suffocating pressure of insufficient cash flow. Typically, debt consolidation frees up cash by lowering your monthly debt payment burden. Depending on the severity of your situation, this alone may be reason enough to proceed with a consolidation. You'll also benefit from certain fixed features: payment, rate of interest, and pay-off schedule. As long as you stick with those payments, you'll know exactly when your debt will be fully repaid. Moving towards that goal of being debt-free can be incredibly motivating. By the time your loan balance hits zero, you should be feeling good about your accomplishment, and confident about your credit management skills.

Don't fall back

You'll want to be careful about reverting to old habits, however. Some borrowers relax too much after consolidation, and fall back into a pattern of overspending. In these cases, debt consolidation most certainly fails. Once that happens, the only solution left is bankruptcy.

Despite what the psychic may tell you, debt consolidation is only helpful when you're committed to the program. Don't proceed unless you're dedicated to becoming debt free. If you aren't prepared to buckle down and get serious about debt elimination, the risk of a consolidation backfire is just too great.