Bill Consolidation: Pros and Cons
Is Bill Consolidation For You?
You want a quick escape and for some consumers bill consolidation is the answer. They can get a loan or credit line, combine those bills and shoot them all down at once.
Caution: bill consolidation can be effective, but don’t mistake it for a silver bullet. If the person pulling the trigger isn’t careful, those elephants will rumble back to life and be more terrifying than ever.
That reality often gets lost in the initial debt relief that bill consolidation brings. There is no more stressing over sending different amounts of money to a variety of creditors. When you have just one easy payment instead of, say, five, it can feel as if you’ve eliminated four-fifths of your debt.
That’s not the case. You still owe the same principle balance, you’ve hopefully made it easier to pay but reducing the interest rate and monthly payment.
Just reducing the overall interest rate, can save real money. That’s especially true if you are getting a home equity loan or line of credit. You are using the equity in your home as collateral, and interest rates vary from about 3% to 10%.
Even if the highest rate is all you qualify for, it’s still appreciably cheaper than the 15.5 percent average interest rate credit cards are socking you with. And the interest you pay on home equity loan is typically tax deductible.
The downside is that a home equity loan is essentially a mini-mortgage. If you don’t pay it, the creditor can take your house.
Bill Consolidation Through Credit Card Balance Transfer
That’s not the case with another popular bill consolidation strategy: the credit card balance transfer. You can take what you owe on all your cards and put it all on one piece of plastic, sometimes at zero interest.
It’s quick, easy and requires no collateral, but beware. The low introductory interest rate is just that – introductory. It usually skyrockets after six-to-12 months. The balance transfer fee – usually around 3% — can be an eye-opener.
So read the fine print, then make sure you can pay off the balance before the interest rate goes up. If not, you’ll just end up in a bigger hole.
Bill Consolidation With a Signature Loan
Another source of money for bill consolidation is a signature loan. It’s basically a promissory note stating you’ll pay back the money.
The hitch is that you’ll need a good credit history to qualify for a signature loan. And the interest rate will be higher than a home equity loan since you aren’t putting up any collateral.
Regardless of how you get the money for bill consolidation, remember one word. Then repeat it 100 times:
Recidivism. It is the tendency to relapse into a previous condition or mode of behavior.
The word usually is associated with criminals, though it’s equally applicable with consumers who go back to practicing bad financial habits after doing debt consolidation.
Surveys say that after being released from incarceration, about 70% of inmates are arrested again within three years. When it comes to bill consolidation, it’s hard to pinpoint how many consumers fall back into bad habits, but if there were a Debt Parole Board, it’s safe to say a lot of applicants would not be released from debt.
The problem is they act as if bill consolidation is a Get Out of Jail Free card. The burden of all those separate bills is gone, but what remains is the person who ran up those charges.
Bill consolidation is a Band-Aid, not a cure. If you go from five bills a month to one, it doesn’t mean that 80 percent of your debt is gone.
That should be obvious, but a lot of consumers don’t change their spending habits. Their debt consolidation only leads to piling up more debt.
Consider Bill Payment Consolidation Through Credit Counseling
That’s why it’s often wise to explore other options, like winning the lottery or credit counseling. Since your odds of winning the lottery are almost nil, the second option is far more advisable.
A non-profit credit counseling service like InCharge.org will review your financial situation. It might recommend a Debt Management Program (DMP), which is similar to bill consolidation without the risks.
The counseling agency will work with creditors to lower interest rates and come up with a more suitable monthly payment. Instead of paying individual creditors, you make one payment to the credit agency, which then distributes those funds to creditors.
That eliminates many finance charges, fees and collection calls. A credit counseling service then works one-on-one to change clients’ spending behavior. It utilizes the latest technology to tailor goals and track spending.
An Ohio Study of 50,000 DMP customers found that the average credit score increased from 588 to 608, and 67 percent said the program helped them manage money better.
When it comes to bill consolidation, the key is remembering it’s a two-step strategy. The first is thinning that herd of bills that comes after you every month. The second step is behaving in a way that will keep them from coming back.
That’s the real silver bullet.
(Gerstner, L.)(2016, March) Best Ways to Pay Off Every Type of Loan. Retrieved from http://www.kiplinger.com/article/credit/T017-C000-S002-best-ways-to-pay-off-every-type-of-loan.html?page=2
(NA)(ND) Consumer Credit & Payment Statistics. Retrieved from https://www.philadelphiafed.org/consumer-credit-and-payments/statistics/
(Cooper A., Durose M., Snyder H.)(2014, April) Recidivism of Prisoners Released in 30 States in 2005). Retrieved from http://www.bjs.gov/index.cfm?ty=pbdetail&iid=4986
(NA) (ND) Synchrony Financial grant to the National Foundation for Credit Counseling. Retrieved from https://www.nfcc.org/press/nfcc-receives-4-million-commitment-from-synchrony-financial-to-support-enhanced-financial-education/