Todays credit crunch has made many people consider debt consolidation. Although this may seem like a good idea for some, there are some things you should know.

First of all, debt consolidation works just the way it sounds; You combine various debts you have — such as credit card balances, personal loans and so on — into one single loan. This single loan will carry an interest rate that you hope to be lower than the average of what you were paying before.

According to a certified financial planner with NEBSCO Financial Services, Arnold Graf, , debt consolidation might be a great way out for people who have sufficient equity in property and are credit worthy. But he also said that very often those who are thinking of debt consolidation are actually very close to bankruptcy and what they are doing is just trying to push their debt as much further out as the can.

Debt consolidation for some people will serve to basically buy time as you will be paying a monthly payment less than you did before but it will have a longer period of time to pay it all off.

If you are considering debt consolidation, you need to understand that debt consolidation is probably only good on paper. What you do is just take higher interest loan like credit card debt and then roll it into a much lower interest loan and thus paying only one debt each month instead of many different debts. But in reality, unless you are highly discipline and do not take any more new debt while in a debt consolidation program, this whole debt consolidation thing is just not going to work.

There are already too many people who were trying to be financially savvy in the beginning by moving all their bills into a debt consolidation loan but the next year or so they are back with even more new debt on the same credit card which they rolled into the loan before. But this time it is going to be worse for them because now they have to make the debt consolidation payment every month on top of the new credit card debt.

There are several common mistakes that usually people do after going for a debt consolidation loan. If you are thinking of consolidating your debt, beware of the following:

Do not use home equity loans. Some people have several credit card debts and they consolidate them into a home equity line of credit. This is considered a big no-no because credit card debt is a form of unsecured debt which means there isn’t any collateral to back it up. Wrapping it up into a home equity loan, you are offering your home as collateral. This means that if you can not pay off the home equity loan, a lien will be imposed against your home.

These days, more and more people either have little or no equity in their home. They have either tapped it already, failed to build any in the first place because of their choice of mortgages or the property is now worth less than what is owed on it.

There is another common mistake that people do when taking a debt consolidation loan. They consolidate credit card debt from multiple cards into another card with lower interest. They are often attracted to deals that claim to give them no interest for the first year. But in many cases, these cards will usually have hidden charges.

Before you consolidate all your credit card into an new card, you should look at the fine print on the new card you are transferring your balance to and make sure that you understand all the terms written there. Many times people will find it is not as simple as “no interest” for one year. The casualty list of the credit crunch are usually those people who consolidated their debt by transferring credit card balances. Because more often the spending habit of those who practice this are not changed and what happens is that they have new credit card debt in the cards which balance they’ve already transferred before.

Another way that people do to consolidate their debt is go to a bank and get a personal loan. But it is not very easy to do so. In today’s environment, you will have to have very good credit to take out such a loan and you will have to put up some collateral.

All of this may sound very encouraging to you. But the main goal of this article is to reveal to you the pitfalls that most people fall into when getting a debt consolidation loan. If you are discipline and determined enough to get out of debt and also to live within your means and change your spending habit, knowing the pitfalls will help you avoid getting deeper into debt.

The National Foundation for Credit Counseling recommends that your housing not take up more than 30% of your take home pay and that your debts, including car payments, not represent more than 20% of it. If you are already in trouble with debt, experts agree your best bet is to get outside help.

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