Debt consolidation can be a powerful tool when used correctly. The idea is straightforward: you take out a new, single loan to pay off multiple existing debts. This can simplify your finances by giving you just one monthly payment to manage, and potentially a lower interest rate, which could save you money and help you get out of debt faster. Sounds great, right? And for some, it is.
The truth is that you can have success with debt consolidation but you need to be very careful before making it a go to strategy that you think will solve your problem.
The Dangers of Debt Consolidation
However, there’s a darker side to this strategy, one that many debt consolidation companies won’t advertise. It's a clever bit of marketing spin that can be incredibly deceptive. You'll hear phrases like, "Congratulations, you've paid off your credit cards!" or "Become debt-free faster!" They sell you on the feeling of a clean slate. And who doesn't want that? The weight of those multiple bills lifted, the endless juggling act over.
But here's the hard truth they often gloss over: you haven't actually paid off anything. You've just moved your debt around. Think of it like this: you have a bunch of heavy boxes cluttering up your living room. A company comes along and says, "We'll get rid of all these boxes for you!" So they come in, pack all your smaller boxes into one giant crate, and move it into your garage. Is your living room clean? Yes. Are the boxes gone? Absolutely not. You still have to deal with the giant crate in the garage; it's just in a different place.
That’s exactly what happens with debt consolidation. Your credit card balances may be zero, but you now owe the same amount of money to a new lender. The debt isn’t gone; it has just changed its address.
This is where the real danger lies. The very act of clearing your credit card balances can create a powerful and dangerous illusion of financial health. Psychologically, you feel like you've made a huge step forward. You see those zero balances and think, "I did it! I'm free!" That feeling of relief can be so intoxicating that it makes it incredibly easy to fall back into old patterns.
A TransUnion study found that while consumers who consolidated credit card debt saw an initial decrease in their balances, for many, those balances returned to near previous levels within 18 months.
Before you know it, you're tapping your credit card for gas, then for groceries, and then for a "well-deserved" night out. You tell yourself it's just a small amount and you'll pay it off at the end of the month. But the old habits that got you into debt in the first place haven't disappeared. And now, you're in an even more precarious position. You have the new, large consolidation loan payment every month, and you're racking up new debt on the very credit cards you just "paid off."
So Why do we end up using our credit cards again?
The reason so many of us find ourselves staring at new credit card balances just a few months later has almost nothing to do with the loan itself. It has everything to do with the fact that we never addressed the very things that marched us into debt: our daily habits, our reflexive behaviors, and our in-the-moment choices.
Let's break it down.
Remember, the goal isn't just to get out of debt; it's to stay out of debt. And that requires a long-term shift in your mindset and your habits. Don't let a clever marketing slogan derail your journey to true financial freedom.
If you change your habits, behaviors and choices then debt consolidation can be a tool to help you climb out of debt. Without that change you risk digging yourself a bigger hole to climb out of.
