Myths Busted: 6 Misconceptions About Debt Consolidation

For consumers with existing debt that is too high for them to pay down, debt consolidation can become an attractive option for managing this debt and creating a path to becoming debt-free.

Before you start the debt consolidation process, though — or dismiss it as a poor option to address your specific debt challenges — it’s important to make sure you fully understand the opportunities and limitations of debt consolidation. Many consumers hold certain misconceptions about debt consolidation that pushes them away from a valuable financial service or lures them in with false expectations.

Let’s set the record straight on debt consolidation and how it can help your financial situation. Here are six common myths and the truth behind each.

Myth No. 1: Most offers of debt consolidation are a scam.

Consumers should always be on the lookout for scammers attempting to take advantage of unsuspecting debtholders. But many reputable financial institutions offer debt consolidation services that provide genuine value to consumers. 

This can include both debt consolidation products and other loans as well as debt counseling to help you chart a course out of debt. Common debt-related scams include companies offering to reduce or wipe out your debt in exchange for an upfront fee or to quickly reduce damage to your credit suffered as a result of debt consolidation.

Be wary of companies that want upfront payment in exchange for future services. Despite these potential scams, many reputable companies offer debt consolidation to help you lower your monthly payments and your interest rate while clearing a path to greater financial freedom.

Myth No. 2: Consolidating debt reduces the amount you owe.

While it’s technically true that debt consolidation can reduce what you ultimately pay by securing you a lower interest rate, it doesn’t reduce the principal amount of debt you owe to your creditors.

Some creditors may offer to accept a smaller repayment amount in exchange for an upfront payment made in full. But most mechanisms to consolidate debt simply repackage this debt via a more consumer-friendly loan or line of credit, meaning the principal owed will be the same after consolidation as it was before.

Myth No. 3: Debt consolidation hurts your credit score.

Hard credit inquiries — which will be required when applying for debt consolidation loans — may have a minor impact on your credit score. But these inquiries typically have a nominal impact due to the limited emphasis credit bureaus place on this activity.

Over time, debt consolidation may improve your credit score through on-time payments and fewer negative marks on your credit report. A lower debt utilization ratio, achieved incrementally as you pay down your debt, could also boost your credit score.

Myth No. 4: Debt consolidation is always cheaper than paying off your debt as quickly as possible.

Debt consolidation doesn’t make sense for every consumer, which is why it’s important to calculate your estimated savings offered by any consolidation option you choose.

If your existing debt is small and/or your interest rate on that debt is relatively low, the transfer fees and other costs associated with debt consolidation products may not make a big impact on what you ultimately pay. Use a debt repayment or loan calculator to figure out whether consolidation makes sense.

Myth No. 5: Debt consolidation is too expensive to save you money.

While there may be some costs associated with consolidating your debt, the interest savings can be significant — especially if you’re consolidating debt from high-interest credit card balances to a loan charging only a fraction of that interest.

Debt consolidation fees are often nominal when transferring debt, making this affordable if these services can offer short- and/or long-term financial relief.

Myth No. 6: Debt consolidation is a long, difficult process.

Although certain types of loan products can involve lengthy processing periods, many debt consolidation products and loans can be acquired within a few days to a week. Depending on the amount of debt you’re looking to consolidate, this is often an easy process that can quickly deliver the financial relief you’re seeking through consolidation.

Interested in exploring all of your options to find the most cost-effective option for debt consolidation? Your local credit union offers a number of resources and account specialists to help you evaluate your options and choose the best approach. Become a member today by opening a checking account.