"88% of people who pursue debt consolidation continue the negative habit pattern of not budgeting, overspending and go even further into debt." - Dave Ramsey
I’ve had several students reach out to me recently about this particular subject.
Anytime that happens, I take it as a signal to create a piece of content to serve as ammunition for our growing "zero debt" tribe against the darker forces in this world. :)
Many times this temptation to look at "debt consolidation" services appears some time after the first few “quick wins” have been marked off the debt snowball list.
This is where the “ants in the pants” kicks in because, even though you’re laser focused and winning, the process of paying off the bigger debts toward the latter part of the debt snowball can make it feel like you’re losing momentum.
You’re not losing momentum. It just seems that way. This encroaching sense of "slow motion" is normal and natural.
I just encourage you to stay the course and reach out to me so I can plead with you NOT to get into one of these debt consolidation monsters.
Debt consolidation is a process by which a singular company (a debt consolidation company) combines several unsecured debts “for you” and allegedly lowers the interest rate, monthly payment and also allegedly “simplifies” the payment process for you.
The types of debt they usually “consolidate” are unsecured ones like: credit cards, payday loans, medical bills.
Let’s talk about the unseen pitfalls and help equip you with the information you need to avoid debt consolidation altogether.
Don't (voluntarily) walk the Debt Consolidation tightrope.
It does nothing to address the underlying issues of why you’ve gotten to this point in the first place.
In other words, the “easy out” they appear to give you doesn’t cause real change in your behavior.
One blogger even says, “Debt consolidation doesn’t remove your debt, it just moves it around."
You MUST work the “8 Steps To Erase Debt”, one at a time and in order to 1) develop a new mindset and habits around money and 2) get completely out of debt and never go back.
From that perspective in particular, debt consolidation is just a “band-aid”.
Dave Ramsey is quoted as saying, "88% of people who pursue debt consolidation continue the negative habit pattern of not budgeting, overspending and go even further into debt."
I say, NOPE!!
We want you to eliminate it, forever. I know it’s actually harder, but it’s better AND done correctly, more permanent.
Like I mentioned earlier, there is always a tendency with people who are in the latter parts of their debt snowball where the numbers are bigger to be tempted into these types of schemes.
Don’t do it. Instead, stay the course and reach out to your coach/mentor/accountability partner to talk you off the ledge.
What looks simple on the surface actually potentially adds potentially multiple layers to your debt elimination process.
If you work with a consolidation company that also negotiates new interest rates with your creditors for example, you’ll have to make sure proposals are accepted and that agreements and payments are agreed upon and accepted.
I actually outline an actual story that highlights this later on in the post.
Can you say potential for a slow-motion, 200-car train wreck?
We want you to get out of debt FAST and with as little friction and complication as possible!
So, instead I encourage you to just follow the “8 Steps To Erase Debt” faithfully and you’ll have much more success than you would with a “debt consolidation” loan.
You have to read the fine print here.
Many times these debt consolidation companies will lure you in with a lower interest rate that changes after a certain period of time.
Yes, that's right, the interest can change in very much the same way that an adjustable rate mortgage (ARM) can.
Read the fine print.
Then run away as fast as you can!
Think about that for a second. What guarantee do you have that the debts will ACTUALLY get paid or that the payments will be properly executed?
That's right, ultimately none.
You're actually having to "trust" that these people will do the right thing and always at the right time.
I don't know about you but that would make me turbo uncomfortable.
Think about how difficult and complicated it is for YOU to keep track of all the contact info and bill payment info of your debt. Do you REALLY want to put that in someone else's hands?
Don’t believe me?
Check out the story outlined below. There are SO many others like it, including new ones I get from students every month.
It's an excerpt from the website: https://hansonattorney.com/blog/debt/debt-consolidation-program-nightmares:
"Our second story involves an individual who, along with his wife, had racked up considerable student loan and credit card debt.
Because they were both rising professionals making their monthly payments, they sought out loan consolidation as a way to lower their interest rate and clear up some of their credit balances in order to qualify for financing for a new home.
They signed up for the services of a national debt consolidation company, and immediately started getting calls from creditors about delinquencies.
In the calls from creditors, some had received faxed settlement proposals and some had not. Some creditors had agreed to the proposals and some had not.
The couple discovered that the debt consolidation company would send faxes to as many creditors as they could (some creditors were left out), and whether or not the proposal was accepted, the company started sending in the proposed payment amount.
The couple had so many troubles with the consolidation company not accepting any responsibility and not changing their tactics, that they had to take matters into their own hands, contact the creditors themselves and bypass the consolidation company all together, which is something they could have done on their own in the first place.
The damage to this couple’s credit history had already been done, however, through multiple late payments or charged off accounts.
The couple’s dream of owning a home are now pushed back for the next 4 to 7 years and they consider their dealings with the debt consolidation company the worse thing they could have done for their financial future.
The part that really drove it home for me was the sentence:
"The couple had so many troubles with the consolidation company not accepting any responsibility and not changing their tactics, that they had to take matters into their own hands, contact the creditors themselves and bypass the consolidation company all together, which is something they could have done on their own in the first place.
The point is they could have done it on their own in the first place. That's what I'm not-so-gently suggesting that you do.
Remember, it's a truism that no one is EVER going to take responsibility for your finances the way you do (or the way you should): not a debt consolidation company, not a bank, not a mortgage company, not even a financial advisor.
It's my own personal conviction that, using a debt consolidation service would be like turning over control of your whole debt payment scenario to your aging alcoholic uncle who is, habitually unemployed, notoriously disorganized, colossally irresponsible and annoyingly forgetful.
Do you really think that's a good idea?
Let me just come out and beg you, please don't do it!
Let's instead focus on getting you out of debt the proven way.
0. Stop All Retirement Investing (Until Step 4)2. Starter Emergency Fund of $10003. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)4. Full Emergency Fund of 3-6+ Months’ Expenses5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)6. College Funding (if applicable)7. Pay Off The Home Mortgage8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!