Debt Consolidation: The Good and the Bad
While there are a lot of really good things about debt consolidation, there are also some pretty serious downsides that you need to consider.
Most of us have credit cards. Some have more than two, three or even more than ten. I myself have three credit cards that I used only when I feel that a credit card is needed for a particular purchase.
In the past seven to eight years, I have been mostly using my debit cards. Most of the time paying my green fees at the golf course.
Credit card debt is a huge problem for a lot of people. Some people have gotten to the point that they do not even know exactly how much they owe because they are afraid to even open their monthly credit card bill.
They simply mail in the minimum payment and stress about their personal finances.
If you are currently in this situation, you might want to consider consolidating your credit card bills into one large debt.
There are some downsides to credit card consolidation, but there are some really more positive points.
- Less worry. When you have consolidated your credit card debt you will no longer have to worry about which card has been paid and how much money you owe on a particular card.Instead of three or four monthly payments, you will only have to worry about one payment. The people who oversaw the consolidation will take care of who gets paid and when.
- Budget flexibility. Many people find that they have an easier time putting together a monthly budget when they only have to worry about one bill instead of several.The fact that the monthly payment is usually smaller than the multiple payments they were making before also helps put less of a strain on the family’s finances.Not only does this allow the person to start setting aside some money for their future retirement, it also allows the person to add to their monthly payment which will get their debt paid off much more quickly.
- Motivation. For many people, the idea that they would have to give up their home is the motivation that they need to get their newly consolidated debt paid off as quickly as they possibly can. No one likes to give up their home.When you consolidate your debts, you are actually arranging for something that is called a secured loan. When you take out a secured loan you are agreeing that if you default on the loan, the company that is holding the loan has the right to take your assets.The asset that is most commonly used to secure the loan is a person’s house.
- Tax Break. Few people know it beforehand, but having your loans consolidated actually, makes you eligible for some tax breaks.The government provides tax breaks on the interest you are paying on your loan, something they do not do for credit card interest. So, even though you are paying the same bills, now you are getting rewarded by the IRS.
- Lower interest rate. One of the biggest perks of debt consolidation is that you will be paying a lower interest rate. The interest on the debt consolidation loan will not be nearly as high as what the credit card companies were charging you.An added perk is that with debt consolidation, some credit card companies will offer debt settlement which can reduce what you owe them by as much as 60%.
Not all debts should be consolidated. Most people assume that having all their debts rolled together will make their life easier and could save them some money. In some situations, this is true, but in others, it is not.
- Student loans. One type of debt that financial experts always warn people to avoid consolidating is their student loans. The reason for this is because the student loans have low interest rates and also special conditions to them.Consolidating the student loans with your other debts could actually cause the interest rate to increase. Consolidating your student loans will also make it very difficult for you to defer the loans if you decide to go back to college to continue your degree.
- Using your credit cards again. One of the biggest mistakes people tend to make when they consolidate their debts is that when they immediately start to use their credit cards again. This is a no-no.This could be the start of a very vicious circle and you will never be able to get out of debt.
Not only should you not start reusing your credit cards, but you should also make every effort to take any cash that you have left over at the end of the month and either put it towards your savings or use it to pay off more of your debt.
Here are a couple of suggestions for you when you decide to consolidate your debts:
1. When you opt to consolidate your debts, you really want to pay attention to how long it is going to take to pay off the loan. This is not the kind of loan that you want to still be dealing with in thirty years.
2. You want to try to get the smallest minimum monthly payment that you can arrange and then pay as much as you can afford to every single month.The smaller payments mean that you will be okay in the month when your money is tight, and by paying more than required you will get out of debt much quicker.
There are many pros and cons to getting your debt consolidated. This is not something you should do impulsively.
You need to consider all of your options before making a final decision. Only then will you know if debt consolidation is a good choice for you.