Hindsight is 20/20. When it comes to debt consolidation, it can also be expensive. To avoid costing yourself big money, learn about some common debt consolidation mistakes before they happen.

There's nothing as frustrating as watching a horror movie. How many times will an innocent young victim wander into a spooky area and meet certain death? Surely she's seen a horror film before, and is quite aware of the consequences of wandering into a darkly lit corridor all by herself...but she does it anyway.

Hopefully, people considering debt consolidation won't be as unconscious as these celluloid victims. Ideally, they'll follow advice that they receive upfront, such as the following:

1. Credit report amnesia

In this day and age, when identity theft is the world's fastest growing crime, it's important to check your credit report on a regular basis to make sure that no one has opened any new accounts, or made any charges on your existing ones.

Beyond identity theft, you need to understand your credit score. If it's in the 500 to 620 range, you may have difficulty getting a debt consolidation loan. Scrutinize your entire report to make sure that no errors have been made by the bureaus that track your financial life. If you spot any, report them immediately. This could raise your score.

2. Lack of accountability

Debt consolidation won't help if you can't stick to a budget. Take time to track your finances on a monthly basis. Look carefully at all your expenditures, and see if there are any areas you can cut back on. Once you've initiated the debt consolidation program, you'll need to stick to the plan. It won't do you any good if you cut your overall payments by $200 to $300 per month, only to start spending that money somewhere else.

3. Relying on experts

As you consider a debt consolidation loan, don't rely on someone else to tell you which debts to target. Dig up the paperwork on your outstanding debts and make sure that you're clear on the interest rates and the terms for each loan.

You may, for example, have a large loan that you're only a few months away from paying off. If you lump it into a debt consolidation, you could wind up needlessly stretching out payments. You'll also want to take a careful look at the interest rates on all your cards versus the proposed debt consolidation loan rate. If you have a card balance at a low rate, it may not make sense to roll it into the loan.

There's no logical reason why people in horror films walk cluelessly into the arms of a waiting monster. Equally as bewildering is the fact that many people wander into the debt consolidation process blindly, which winds up costing them more money in the long run. Fools rush in, so take time to do your homework. If you do, your financial life can begin morphing from a horror show into a musical comedy.

Published on January 20, 2008