Are credit card or debt payments eating up your bank account? Unfortunately, that’s the reality for many Americans. Juggling multiple payments in one month can be stressful and make you desperate for a solution. Many people turn to debt consolidation to come to their rescue. However, before you apply for a loan, here are the top four debt consolidation mistakes to avoid.
Not Trying All Your Options First
Debt consolidation is only one way to help eliminate your debt. If you’re not ready to take out a loan, there are ways to get extra support to pay your bills. You should consider the following methods:
- Creating a payoff plan
- Asking for debt reduction
- Seeing a credit or financial counselor
Missing a Debt Payment
Another common debt consolidation mistake to avoid is missing a payment. Having a late or missing payment with any credit company can have negative consequences. When you hit the 30-day passed due mark, lenders and creditors will alert the many credit bureaus, which can hurt your credit score and add hefty fees to your original balance. Setting up autopay or paying on days that best work for you will help curb this habit.
Not Checking Your Credit Report
Your credit score plays a significant role in your eligibility for a consolidation loan. Lenders will examine your score to determine if you’re trustworthy enough to repay your loan. If your score is unsatisfactory, it will be harder to get approved. This is because debt consolidation loans already carry financial risks, and lenders don’t want to give you a loan you’re not likely to pay back.
Check your credit report for errors or fraud, and give yourself time to build your credit score. A satisfactory credit report and payback schedule will help you get approved for a consolidation loan.
Not Checking for Additional Fees
When you apply for loans, it’s essential that you read the financial terms and conditions. The fine print will have all the crucial details that could get lost within the document itself. There are typically two fees to watch out for when applying for debt consolidation: prepayment penalties and origination fees. You may see origination fees, which are upfront charges that lenders assess for your loan process.
While they’re not in every loan, prepayment penalties are fees for paying off your loan early. For example, perhaps you have a 48-month personal loan, but you pay it off in 45 months. Some lenders will charge a fee for paying your loan three months early. To avoid these charges, check the terms and conditions to see if this penalty applies to your loan.
