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Mythbusting: 5 common misconceptions about debt consolidation

11/03/2021

If you owe money to several creditors, it can be a nightmare. You have the bank chasing you for money over the phone one day, and a payday loan company sending you angry letters the next. How do you keep everyone happy?

One way is by using debt consolidation. The concept is simple: Instead of managing lots of debt repayments to several different creditors, you combine all those debts into a single loan. By paying towards the consolidation loan, you pay towards all your debts and make things easier on yourself.

In the next part of mythbusting series, we take a look at some common misconceptions about debt consolidation, and help you understand the truth behind them.

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1. Debt consolidation is cheaper overall

The concept of taking a whole load of different debts and turning them into a single debt can lead some people to believe that, by consolidating their debts, they’re somehow reducing their debts overall. That’s not the case.

The truth is debt consolidation doesn’t lower the amount you owe. If you choose to consolidate your debt, the balances you owe to your individual creditors will remain the same. What debt consolidation will help you with is debt management.

If you owe £1,000 to three different creditors and decide to consolidate, you will still owe three lots of £1,000, except now all you have to do is make a single monthly payment towards an overall debt of £3,000. The payments will be distributed among your creditors on your behalf, saving you a lot of hassle.

2. Debt consolidation will save you money on interest

Similar to the above, it’s a common misconception that debt consolidation will save you money on interest. The thinking goes like this: If you go from paying multiple loans, each with their own interest rate, to paying a single loan with just one interest rate, you must pay less in interest overall.

Unfortunately, it doesn’t quite work like that. Like any other loan, the lender considering you for a debt consolidation loan will base their rate of interest on your credit score. The higher your credit score is, the better the interest rate you are likely to qualify for.

If your credit score is strong, the interest rate for your debt consolidation loan may be lower than the interest rates of any of your existing debts. While that will lower the amount you pay in interest, your debt level won’t change, and your monthly payments may even increase if you decide to extend the payment term.

3. Debt consolidation just leads to more debt

One of the biggest misconceptions about debt consolidation is that it doesn’t actually help you deal with your debt – it’s just a way to kick the debt can down the road. It’s easy to see why some people think this. As we mentioned before, consolidation won’t actually help you lower your total debt level, or necessarily save you on interest.

That doesn’t mean it will cause you to rack up even more debt, however. Quite the opposite. One of the easiest ways for people’s debt to spiral out of control is with missed payments. When you default on one payment, you get hit with a late fee, which makes it difficult to free up the cash to make the next payment. And on and on it goes.

Debt consolidation helps people break that cycle, by ensuring they only ever have to keep track of one monthly payment. Instead of having to pay the bank, the credit card provider, and the payday loan company on time and in full, you just have to make sure you keep up with one monthly payment. The rest is taken care of for you.

4. You can’t consolidate debt with bad credit

This is one of the most misleading myths of all. The truth is, debt consolidation is most helpful for people with bad credit. If debt consolidation wasn’t accessible for people with bad credit, lenders would lose out on some of the people it’s most attractive to.

The truth is, the people who are juggling multiple payments to multiple creditors are the same people who are most at risk of hurting their credit scores. Trying to keep that many creditors happy isn’t easy – one missed payment, and your credit rating will take a serious hit.

That’s where debt consolidation can help. Unlike many financial products on the market, debt consolidation isn’t closed to people with a patchy credit history. When you consider that you’re a) simply transferring credit, and b) showing a real willingness to get on top of your finances, you can see why DCL lenders are more likely to look upon you favourably.

5. Debt consolidation ruins your credit score

This final myth is a bit of a two-parter. Firstly, will debt consolidation have an impact on your credit score? Yes, it will. But will that impact be negative in the long run? No, absolutely not.

There is no doubt that when you first enter into a debt consolidation loan, your credit rating will take a hit. That happens with all debt solutions. The very fact that you’ve taken on more credit is enough to see your credit rating take a bit of a bump.

The good news is that this should only be temporary. As long as you keep up with your payments to your debt consolidation loan, you’ll begin to build a positive credit history, make a dent in some of your debts, and see your overall debt level start to come down. And as that comes down, your credit score will go up.

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We’re here to support you

As the UK’s largest IVA provider, Creditfix is proud to offer confidential and professional advice to those in need. We understand that talking about debt isn’t easy, which is why our expert advisers are trained to help you find a debt solution that works for you.

To speak to an adviser today, call 0808 253 5687, or click the button below to see if you qualify for formal debt help.

We have a wide range of debt management solutions that could help you write off up to 81% of your debts

Check if you qualify

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