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July 22, 2024

5 Mistakes to Avoid When Consolidating Debt

Debt consolidation is a strategy for saving money and getting out of debt—as long as you avoid the major debt consolidation mistakes people often make.


Debt consolidation is a common strategy for saving money and getting out of debt—as long as you avoid the major debt consolidation mistakes that people often make.

Combining several debts into one is becoming a more common practice. By doing so, borrowers can simplify their finances and lower monthly payments.

However, the process comes with its own set of challenges and potential pitfalls. Making mistakes during debt consolidation can lead to financial stress rather than relief.

This article highlights five key mistakes to avoid when consolidating debt. By doing so, you can ensure that you make the most of this financial strategy and move towards greater financial stability.

Start your application with MIDFLORIDA Credit Union.

Mistake 1: Consolidating debt without a proper financial assessment

A thorough financial assessment is highly advisable before consolidating debt—you’ll gain a clear understanding of your financial situation, ensuring that debt consolidation is the right solution for you.

By assessing your finances, you can:

  • Determine the total amount of debt you owe
  • Pinpoint your current income
  • Detail your monthly expenses

It’s a holistic view essential for making informed decisions about debt consolidation.

Evaluating the current financial situation

  1. List all your sources of income.
  2. Categorize your expenses into fixed (e.g., rent, utilities) and variable (e.g., groceries, entertainment) costs.
  3. Calculate your total debt, including credit cards, personal loans, and other liabilities.

This evaluation also helps you identify areas to cut costs and allocate more funds toward debt repayment.

Potential consequences

Without a clear understanding of your financial position, you might choose a consolidation option that does not address your needs or exacerbates your financial problems.

For example, you might take on a loan with high fees or an interest rate that doesn’t save you money in the long run.

Additionally, you must address underlying financial issues so that you don’t accumulate new debt, further complicating your financial situation.

Mistake 2: Ignoring the terms and conditions of the consolidation loan

Many borrowers make the mistake of not thoroughly reading the loan agreement, which can lead to unpleasant surprises.

The fine print often contains important details that can significantly impact the overall benefit of the consolidation, including information about:

  • Fees
  • Interest rates
  • Repayment terms

Interest rates and fees

A lower interest rate can save you money over time, but it’s important to factor in all associated fees, such as:

  • Origination fees
  • Application fees
  • Prepayment penalties

These costs can add up—reducing the overall benefit of the consolidation.

Compare the total cost of the new loan to your current debt obligations to ensure you are making a financially sound decision.

Hidden clauses

Hidden clauses in the loan agreement can affect repayment terms and your financial well-being.

For instance, some loans may have variable interest rates that increase over time or penalties for early repayment.

Mistake 3: Consolidating debt without changing spending habits

The underlying causes of your debt are a fundamental part of what needs addressing.

Bad habits like overspending or inadequate budgeting can resurface quickly if you're unaware. 

Debt consolidation allows you to reset your financial habits and adopt more disciplined spending practices—but you must follow through.

Create a budget

Tracking your income and expenses through proper budgeting helps ensure that you can live within your means.

Allocate funds for essential expenses, savings, and debt repayment, and set limits for discretionary spending.

A well-structured budget can prevent overspending and help you maintain financial stability.

Developing financial discipline

  • Identify and eliminate unnecessary expenses
  • Set your financial goals
  • Regularly review your budget
  • Use tools like expense tracking apps to monitor your spending and make adjustments as needed
  • Build an emergency fund/financial cushion, reducing the need to rely on credit in the future

Mistake 4: Overlooking the impact on credit score

Applying for a new consolidation loan may initially result in a hard inquiry on your credit report, which can cause a slight dip in your score in the short term.

However, if used effectively, debt consolidation can improve a credit score by lowering the credit utilization ratio and demonstrating responsible debt management.

The long-term benefits can outweigh these initial drawbacks.

Making consistent payments by the due date on your consolidation loan and reducing your overall debt can lead to a noticeable improvement in your credit score over time.

Monitor that credit

Regularly check your credit report. Look for any errors or discrepancies and track your progress.

This helps ensure that your efforts to consolidate debt are positively reflected in your credit profile.

Mistake 5: Failing to explore all debt consolidation options

Various debt consolidation methods are available, including personal loans, balance cash-out refinancing, transferring credit cards, and home equity loans.

Each ‘get out of debt’ option has its pros and cons. The best choice depends on your financial situation and goals.

Comparing options

Consider factors like interest rates, fees, repayment terms, and the total cost of the loan. Understanding the benefits and drawbacks of each method can help you make an informed decision that aligns with your financial objectives.

Seeking professional advice

Consulting with a financial advisor can reveal valuable insights into your debt consolidation options.

Professionals can help you evaluate your financial situation, compare different methods, and choose the best debt management strategy.

Seeking expert advice ensures you make well-informed decisions and avoid common pitfalls in the consolidation process.

Debt consolidation mistakes: Conclusion

While debt consolidation can be an effective strategy for managing multiple debts and lowering overall interest rates, mistakes made during debt consolidation can increase financial stress instead of relief.

Avoid the most common debt consolidation mistakes and consult with a debt-management professional to ensure you achieve the right goals in the right way.

MIDFLORIDA has refinancing options for debt consolidation

Another option for debt consolidation is through a cash-out refinance—leveraging the equity in your home to pay off high-interest debts.

This method can simplify your financial situation by combining multiple payments into a single, lower-interest mortgage payment.

Approach this option with careful planning and informed decision-making to ensure it aligns with your financial goals and circumstances.

Start an application with MIDFLORIDA to see if this or other home equity options suit your situation.

This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.

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