If the headlines and news articles are telling an accurate tale, many U.S. seniors are entering their so-called golden years in precarious financial shape. One example: we’ve recently come across a seeming barrage of articles about retirees and debt. It’s an important subject that we’ve written about in the past few weeks here on the Blog. As we wrote, many seniors are finding themselves “another year older and deeper in debt” with no light at the end of the tunnel.

For some, the lure of debt consolidation can seem enticing. Merging many debts into one, the theory goes, can help borrowers budget better and make it simpler to keep track of payments. Many advisors also claim that those dealing with debt can get out from under the burden faster by focusing aggressively on one monthly payment instead of many.

But is debt consolidation always the best solution? What are the pitfalls? To explore the answers to those and other questions, we’ll turn to this recent article from NextAvenue, written by freelance journalist Lucy Lazarony. We’ll also ask Rajiv Nagaich for his take on the topic.

Debt Consolidation: When the Debt Hole Keeps Getting Deeper

Many readers will be able to identify with a New York man Lazarony calls Abe, whose $13,000 in credit card debt was getting to be too much to handle. “The interest would nullify the payment,” Abe told Lazarony. “You can’t go on like that.”

“For help with his credit card debt,” she continues, “Abe, who agreed to tell his story only as long as his full name was not used, reached out to Consolidated Credit, a nonprofit credit counseling organization in Fort Lauderdale, Florida. It enrolled him in a debt management plan. ‘They came up with a payment plan. They were able to speak to my bank and get my interest rate way down,’ he recalls. ‘I’m very happy my money is going toward a solution.’”

Lazarony says Abe’s story had a happy ending. “After years of struggling with credit card debt, he had found a way out,” she writes. As Abe told her, “They pretty much made it possible for me to go forward. I’m grateful to them.” But not all so-called debt solutions turn out so well.

Debt Consolidation: Choosing the Right Option

Lazarony writes, “If you have high-interest credit card debt, especially if you have multiple debts, you may benefit from debt consolidation. You’ll have one payment to make each month rather than many and you may land a lower interest [rate].”

The problem of credit card debt is real and growing. About two-thirds of seniors say they have outstanding credit card debt, a big jump from the 40 percent who said the same in 2022. Total credit card debt among all Americans has reached a dizzying $1.13 trillion.

So, what are some types of debt consolidation strategies? Lazarony examines four common ones. Each has advantages and drawbacks.

Transfer Your Credit Card Balances to a Single Low-Interest Card

“If you have good credit, transferring credit card balances to a single card with a lower interest rate will save you on interest rate charges and give you just one payment to manage each month instead of many,” Lazarony explains in her article.

She spoke with April Lewis-Parks, director of financial education at Consolidated Credit. “Making a balance transfer can be a great tool for managing debt,” Lewis-Parks says. “One of the main benefits is moving high-interest debt to a card with a lower or even zero percent introductory interest rate. This saves you money on interest charges allowing you to pay off your balance faster.”

Credit Card Balance Transfer: Beware of Common Potholes

But, as Lazarony warns us, there are some significant downsides to keep in mind, notably hidden fees and interest-rate hikes.

“Many balance transfer offers come with fees — usually a percentage of the amount you transfer,” Lewis-Parks told Lazarony. Also, she adds, “If you don’t pay off the balance within the promotional period, the interest rate can jump significantly.”

The only safeguard is to be fully informed and stick to your plan. “To ensure a successful balance transfer make sure you understand the fees, promotional period and what the interest rate will be after the promotion ends,” Lewis-Parks says. “Next, plan your payments. You’ll want to divide your balance by the number of months in the promotional period and create a budget that allows you to pay it off during that time.”

Discipline is also essential: make sure you buy nothing with the new card. There are two reasons: first, according to the article, the card company may apply your payments to the transferred balance, leaving new purchases to accrue interest. Second, if you dig your debt hole deeper with your new low-interest credit card, you’ll almost certainly see that interest rate skyrocket, starting the debt cycle all over again. Experts advise that you keep track of your payments, and consider automatic payments to avoid missing any deadlines.

Home Equity Loan Can Be a Good Option – With Risks

For most Americans, home equity is by far their largest asset. Tapping this pile of cash can be one quick way to pay off debt. “Using a home-equity loan to consolidate multiple debts can be a smart strategy if you’re looking to simplify your finances and reduce your monthly payments,” Lewis-Parks advises.

She also told Lazarony that these loans can be much cheaper than credit cards. “The biggest advantage is that home-equity loans often come with lower interest rates than credit cards or personal loans,” she adds. “This can save you a significant amount of money in interest over time, especially if you have high-interest debts.”

Biggest Risk: Your Home is “On the Line”

Lazarony is quick to point out that tapping into home-equity comes with potentially serious risk. As Lewis-Parks explains, “The biggest one is that you’re putting your home on the line. Since a home equity loan is secured by your property, failure to make payments could result in foreclosure.”

We were curious about the likelihood of this dire consequence – foreclosure – so we checked out a recent related article from Investopedia. It explained that, if you default on a home equity loan, whether the lender forecloses may depend on how much equity you have. “If you have enough equity in your home, your lender will likely initiate foreclosure procedures,” says Investopedia, “because it has a decent chance of recovering some of its money after the first mortgage is paid off. The more equity, the more likely your lender will choose to foreclose.”

By contrast, if have only a small amount of equity – or none – “the lender may choose to sue you personally for the money you owe,” the article continues. This scary outcome will leave you with legal bills, damaged credit, and possibly garnished wages – a prospect to avoid.

Before leaving the topic of using a home equity loan to reduce debt, the NextAvenue article brings up two further drawbacks. First, these loans have longer terms which can end up keeping you in debt longer. Second, look carefully at upfront fees and closing costs that are part of home equity loans, since they may reduce the actual proceeds of your loan.

A Debt Consolidation Loan Can Simplify Debt Management

Sometimes the simplest solution is to borrow from a bank or credit union to pay off debt. Lazarony writes, “Moving multiple debts into one debt consolidation loan is one way to simplify payments and, if your credit is good enough, lower the interest rate on your debt.”

She spoke with Bruce McClary of the National Foundation for Credit Counseling. “Debt consolidation loans can provide a simplified approach to managing multiple debts,” he told Lazarony, “by combining them into a single loan. By potentially securing a lower interest rate, you can reduce the overall cost of your debt.”

Check for Hidden Fees and Shop for Best Interest Rate

But, here again, says the article, you’ll have to read the paperwork carefully to watch out for fees. “Be aware of potential fees associated with these loans and the potential impact on your credit score during the application process,” McClary advises.

He recommends that “applicants review their credit report, compare offers from multiple lenders and carefully review their budget to make sure they can afford the monthly payments,” says Lazarony. “Check for debt consolidation loan offers from your bank or credit union or from online lenders. And you may receive offers from potential lenders as well.”

The fact is, you might not have to do the searching. “These days, companies that specialize in debt consolidation loans will probably find you before you start looking for them,” Martin Lynch of Cambridge Credit Counseling told Lazarony. “They surf credit reports looking for folks who don’t miss payments but also have high credit balances.” Still, he adds, “The advantage of these loans is, again, that you can repay high-interest rate debt at a lower rate, saving money in the process.”

Develop a Debt Management Plan with a Nonprofit Counselor

There are times, Lazarony suggests, when you don’t want to go it alone, but need outside help. “If you have a number of high-interest credit card bills,” she writes, “you may wish to consider a debt management plan from a nonprofit credit counselor. Rather than juggle multiple bills, you pay one bill to the credit counselor and the counselor makes payments to the credit card companies.”

Melinda Opperman represents California-based Credit.org. “Experience has taught us that this is the best option for most consumers,” she told Lazarony. Like other options, this type of plan consolidates all debt into one payment. “The payment is affordable and you get concessions like reduced interest rates,” Opperman adds.

Trustworthy Debt Counselors Don’t Charge for Assistance

Lazarony explains the program. “In a free counseling session,” she writes, “a nonprofit credit counselor evaluates your situation and explains the ins and outs of a debt management plan.” Opperman adds that non-profit credit counseling is free, and clients are under no obligation to follow the plan. “You can get counseling to find out if a debt management plan is a good option for you,” she tells Lazarony.

The biggest drawback of debt management plans from a debt counselor is that you’ll be required to close your credit card accounts while you are on the plan, Lazarony cautions.

Opperman of Credit.org acknowledges that this can be a challenge.

“That’s hard to do, especially for people who are used to having access to credit,” Opperman says. “But we see it as a plus — it guarantees that you won’t be able to get deeper into debt while you work to pay down your balances.”

Rajiv’s View: It’s All Part of a Much Bigger Strategy

We asked Rajiv Nagaich for his view on the NextAvenue article. As usual, Rajiv urges us to take a look at the much bigger picture of comprehensive financial planning.

“For someone who’s in debt,” he told us, “these debt-reduction tactics – balance transfer, home equity loans, and so on – can all be good. If your house is on fire, the first thing to do is to put it out, right?”

He continues, “But here’s the issue I see all the time. Getting ourselves deeper and deeper into debt isn’t a problem, it’s a symptom – just like having a fever isn’t a diagnosis, it’s a symptom. Too often people don’t know why they got into debt in the first place, and then once they find a way out of debt, they go right back to their bad habits and, next thing you know, they’re in debt again. The cycle keeps repeating itself.”

So, what’s the solution? “By all means,” Rajiv replies, “deal with your debt. Get that under control. But at the same time, make a resolution to do things differently. Get a financial dashboard in place. Get your financial house in order with some honest, objective advice from a professional planner who’s not trying to sell you anything. As a first step, come to one of our seminars to see how your finances are part of something much bigger.”

Rajiv ends on a reassuring note. “There’s a solution out there for you, I assure you – and we’ll help you find it!”

Rajiv Nagaich – Your Retirement Planning Coach and Guide

The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public. Retirement: Dream or Disaster joins Rajiv’s ground-breaking DVD series and workbook, Master Your Future, as a powerful planning tool in your retirement toolbox. As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.

You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read.

Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more.

Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important message. And remember, Age On, everyone!

(originally reported at www.nextavenue.org