Debt Consolidation

If you're up to your eyeballs, the fantasy of debt consolidation can suck you right in. Watch out for the slippery side of consolidation loans, balance transfers and other 'easy fixes.'

The phrase "debt consolidation" has always had a magical ring to me, but the deeper one goes to find the truth the worse it looks. There a difference between debt reduction, which is a good idea and consolidation, but often consumers are somewhat mislead.

As if somehow, someone would have the power to mush my debt into one neat little package, which by some incredible financial alchemy would also then shrink the debt itself -- and I'd only owe a hundred bucks or so.

I know I'm not the only idiot who's had this fantasy, because an entire industry has sprung up to support it: The Debt Consolidation Industry and Covert Sting Operation. Every day, I get at least one piece of regular mail offering me low-interest balance-transfer deals for credit-card debt, or arm-twisting e-mail from unknown credit organizations that scream things like:

"DEBT RELIEF IS JUST A CLICK AWAY!"
"CUT YOUR MINIMUM MONTHLY PAYMENTS BY 50% OR MORE!"
"SLASH YOUR INTEREST RATES DOWN TO ZERO!"

These promises are incredibly alluring to anyone who is caught in the quicksand of having too much consumer debt, and who will believe anything, do anything -- click her ruby slippers (bought on sale for just $400!) three times -- to make it go away. But before you start skipping down some financial yellow brick road to see the Wizard of Debt Consolidation, remember this: Watch out for those flying monkeys.

Three bad debt-consolidation moves:

1) The Hard-Money Loan
"The biggest myth about debt-consolidation loans is that they're easy to get," says Scott Kays, president of Kays Financial Advisory Corp. and author of "Achieving Your Financial Potential." If you really need a loan, it's probably because you've already missed a few payments and your credit history has more dings in it than a '74 Ford Pinto.

And that's the problem. Kays says that if you are a credit risk, the consolidator may entice you with promises of an easy-does-it loan, and end up charging you higher interest rates than you're paying now -- as high as 21% or 22%. "Your monthly payment may be lower" with one of these loans, "but you'll end up paying more," says Kays.

2) Debt Consolidators Who Promise to Take Care of Everything
This is the fairy godmother fantasy. This Nice Big Debt Consolidation company comes along and swears they'll make your life soooo much easier. They'll negotiate lower interest rates, reduce your monthly payments -- and all you have to do is make "one EZ payment."

In reality, many debt consolidators build in a fee as part of the monthly payment you make to them. It's usually about 10% of the payment (i.e. about $40 on a $400 monthly payment). They pass along your payments to the creditor -- some debit directly from your checking account -- and get back a 10% to 15% slice that the relieved creditor is only too happy to rebate to the consolidator.

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