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Considerations before you consolidate

Scores of Washington, D.C. residents are seeking debt relief from loans, credit cards and other borrowing opportunities. Debt consolidation may seem like a life raft for those who are sinking in financial mire, but industry experts warn consolidation alone may not be the panacea for all money problems. Even though many consolidation companies promise lower payments, better interest rates and more convenient processes, the reality often brings just the opposite. Here's how to avoid the common traps that can befall people seeking debt consolidation.

First, debt professionals say that consolidation should not be viewed as a cure-all step. If your goal is to eliminate your debt entirely, consolidation might actually work against you; nearly 3 in 4 borrowers end up with more debt after consolidating than they would have had otherwise. Why does this happen? As consolidation loans lower your payments, you are more likely to ring up debt on your cards again, assuming you have not changed your spending habits. Behavioral change is a big component of permanent debt relief.

Second, some consolidation services are so expensive they end up costing clients more than the final cost of the debt itself. Many loan services provide much of the information you could find yourself - but they charge for the information you could obtain at no cost. You can pursue your own format of debt consolidation by pursuing low-interest cards, taking out a home equity loan or even looking toward another unsecured line of credit.

Finally, you could wind up paying more interest over time with the consolidated package; you might be paying less each month, but your contribution over the long term is significantly more. Paying down your loans one-by-one could ultimately save you more money over time.

People who are concerned about their debt relief efforts should seek the counsel of a qualified bankruptcy attorney or financial planner. These professionals can help you determine the right course of action for your specific circumstance.

Source: usnews.com, "4 debt consolidation traps to avoid," Robert Berger, April 12, 2013

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