4 Myths About Debt Consolidation That Could Be Costing You Money

Debt consolidation can be an effective way to eliminate high-interest credit card debt, yet some consumers choose not to go ahead with it because of some myths surrounding it.

Here is a list of four myths that could cost you money and keep you in a cycle of debt.

Myth #1: Debt consolidation hurts your credit score 

This is a myth that can stop people before they even get started. Debt consolidation does not need to hurt your credit score. If you consistently make payments on time each month until your debt consolidation loan is paid off, using this strategy could improve your score. 

 The “credit score” myth may have started because there could be a slight drop in your credit score when you first apply for a debt consolidation loan. That’s due to the “hard inquiry” the lender performs during the approval process, but this decrease is temporary.  

Myth #2: Debt consolidation leaves you deeper in debt 

Falling “deeper in debt” with debt consolidation happens when a consumer doesn’t change their spending habits, such as limiting credit card use after paying off their balances. Continuing to spend without sticking to a budget can result in new monthly credit card payments to go along with the payments on the debt consolidation loan.

Myth #3: Debt consolidation loans cost more 

The idea that debt consolidation loans must cost more is misleading. Since debt consolidation loans typically come in the form of structured personal loans, they feature terms that are consistent and offer predictable payments. The misconception around higher costs may stem from the fact that those seeking to consolidate may have lower credit scores due to high credit utilization, which can lead to higher interest rates. However, comparing personal loan interest rates to those of existing high-interest debts often reveals consolidation is a financially savvy choice. 

Myth #4: Debt settlement is cheaper than debt consolidation 

At first glance, if it’s available as an option, debt settlement might seem like an easier and less expensive route since it involves paying off debts for less than the total amount owed to the creditor. However, when considering the broader and longer-term financial implications, debt settlement can end up being costlier. This method can significantly damage your credit score, making any future borrowing more expensive. 

Additionally, if a creditor issues a 1099-C form for the canceled amount, you could be liable for taxes on this “income” or see a reduction in your tax refund, if any, further increasing the overall cost. In contrast, debt consolidation offers a more predictable, and often lower overall cost. 

The Bottom Line 

Contrary to the myths, debt consolidation is unlikely to harm your credit score in the long run, push you further into debt, or impose higher costs merely because it involves consolidation. In fact, when you carefully consider the overall implications, debt consolidation often emerges as a more financially sound choice than debt settlement.

In the realm of personal finance, discerning fact from fiction is crucial. Armed with accurate information and a clear understanding of your options, you can make decisions that not only protect but enhance your financial well-being. Always prioritize doing thorough research and consider seeking advice from financial professionals to navigate your path to fiscal stability with confidence.

Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of [publisher] or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.

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