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Credit card debt is on the rise in America, as it has been for several years. In fact, the current level of household debt is the highest it has been since the Great Recession of 2008. As reported in May of 2017, in a recent report by the Center for Microeconomic Data, total household debt reached an unprecedented high of $12.73 trillion, $50 billion higher than the peak realized during the financial crisis of 2008. With the U.S. economy starting to thrive again after many years of almost no growth, banks and other lenders are feeling optimistic about extending credit to Americans once again. This has caused them to relax the stringent lending standards seen during and after the financial meltdown of a decade ago. The impact is that many Americans will accumulate debt that will eventually become a problem for them. If they are struggling with oppressive debt, they will most likely need to mitigate it somehow, probably through a credit card consolidation loan. If you are one of them, you will need to consider five things before attempting to consolidate your credit card debt.
1. Be honest with yourself about why you are in debt
There are a lot ways consumers can rack up a considerable debt problem. It's important that anyone considering a debt consolidation process be honest about how he or she acquired so much debt. Of course, there are circumstances beyond one's control that can plunge someone into debt quickly. Let's look at the reasons people fall into debt and identify the ones that are under a consumer's control. If you are going to consolidate your credit card debt, it's important that you make sure you don't make the same mistakes again.
Many Americans consistently live above their means. If they want to make a big purchase, they want it now and are not able to delay their purchase until they have saved enough to buy it without using a credit card. Having credit cards enables Americans to make purchases that, in actuality, they cannot afford. This makes the idea of having a credit card very attractive to those who consistently live above their means. In fact, estimates from financial institutions state that 70% or more of U.S. consumers have access to one or more credit cards. Having a lack of self-control over the money you spend and succumbing to impulse buys is the number one reason people accumulate avoidable credit card debt. If you are in serious credit card debt because of a lack of self-discipline, address this before you consolidate your credit card debt. If not, you will soon find yourself racking up new debt on top of the old, consolidated debt. This recipe for disaster could end in insolvency and possible bankruptcy.
Having no savings
Americans as a whole aren't savers. In fact, a recent CNBC article notes that nearly 70% of American consumers have little to no money in a savings account. It was also estimated that a disturbing 34% of all Americans don't have any money saved at all. Consequently, most Americans cannot foot the bill for even the smallest of unexpected expenses such as a car repair or a new household appliance, much less a larger emergency such as a substantial medical emergency. Therefore, most consumers rely on a credit card to get them through and cover any gaps or budget shortfalls. Not saving money and consistently overspending are big reasons why so many consumers are in credit cards debt trouble. However, these things are completely under your control. If these are the reasons you're struggling with credit card debt, consolidating your debt will, most likely, not solve your problems. In fact, it may make things worse. There are many other reasons consumers fall into debt that are not under their control. When these things happen, consumers can accumulate a considerable credit card debt problem, sometimes in a very short period.
Cost of living not keeping up with income
Due to a lack of growth in the economy, income growth has been lagging behind the rising cost of living for the better part of the last decade. This causes many consumers to rely on credit cards to cover their budget shortfalls month to month. Over time, their credit card debt can creep up to levels that are unsustainable and place the consumers into considerable financial jeopardy. If this is the case in your household, you will need to find ways to live within the confines of your income by adding additional income or trimming expenses.
The loss of a job by the primary breadwinner in a family can have immediate and severe detrimental effects on the financial health of a family. Often times, a family is completely unprepared to cover their monthly expenses even for a short period. As a result, they may need to turn to credit cards just to cover basic expenses such as food and rent. Sometimes, in order to quell the financial bleeding, the breadwinner must take a lower paying job. While having a job is much better than no income at all, a lower paying job can leave substantial budget shortfalls. Whatever the scenario, a reduced income situation can cause a family to accumulate a large amount of credit card debt in a short period.
Unforeseen illness or injury
Medical expenses can quickly add up when a family is unprepared for an illness or injury. The cost of medical care is very high, even with good insurance coverage. Additionally, if the illness or injury keeps a consumer out of work, the detrimental financial effects often increase dramatically. Just the cost of co-pays, prescriptions, and deductibles can be a huge financial burden on a family that is unprepared. When combined with a loss of income, many will need to rely on credit cards just to survive.
Unfortunately, divorce is a harsh financial reality for many families. Even though divorce rates have fallen over the last decade, many families still endure the emotional and financial stress of breaking up a household. Money is usually at the center of any marriage. When a couple decides to legally part ways, it most often takes lawyers and a judge to divvy up assets and help the couple resolve issues related to finances. Often times, this can leave a family vulnerable to accumulating debt as they divide their households and take on new expenses such as additional rent and utility bills. While there are several reasons consumers fall into debt, many are avoidable by creating an emergency fund. Whatever the reason for your debt, it's important to be honest with yourself and make any lifestyle changes necessary before consolidating your credit card debt.
2. Change your spending habits
The vast majority of consumers in America do not know how to manage their money. Learning how to formulate a budget and stretch a dollar is imperative to financial health and avoiding accumulating large amounts of credit cards debt. Most consumers spend more money than they generate on a monthly basis. If you are serious about resolving your credit card problem, you will need to change the way you manage money and change your spending habits as well. You cannot borrow your way out of debt. If you consistently go over budget each month, you are going to have to trim your expenses, increase your income, or do both.
3. Not all credit card consolidation loans are equal
Consumers faced with considerable credit card debt will eventually need to formulate a plan to get it paid off. Unfortunately, there are no easy answers. If they have addressed the reasons for their debt problem, they may consider getting a credit card debt consolidation loan. While this is a viable consideration for some consumers, some key considerations exist for anyone looking to take a debt consolidation loan. Credit card consolidation loans can be a secured loan, meaning there is some type of property placed as collateral on the loan, or an unsecured loan. Most times, the borrower's home secures a secured loan, if the home has sufficient equity. Unsecured loans generally come in the form of a personal loan. While we will cover the types of loans available to consumers here, it is important to talk to your lender about what option may be best for you.
Mortgage refinance with cash out
With this type of loan, consumers take a new, larger mortgage that pays off the old one, and the excess cash from the loan is usable to pay off their accumulated credit card debt. If they are in good mortgage market conditions, they will, often times, get a lower interest rate that will help them avoid a larger payment on the new, higher mortgage balance. This can solve the debt problem, but there are important aspects of a refinance with cash out for consumers to consider. Most mortgage loans will have significant closing costs, most likely added into the mortgage amount. Not only will you being paying these costs over the life of the loan, up to 30 years, but this will also further detract from the equity in your home. It's also important to understand that attaching your credit card debt to your home moves that debt from an unsecured position to a position secured by your home, which is your most precious asset. In addition to the increased risk, you will be paying interest on that money for a long time. Even with a much lower interest rate, you could actually end up paying more interest over the long haul.
Home Equity Line of Credit (HELOC)
Another type of mortgage loan to consider is a home equity line of credit. These loans allow you to draw on the equity of your home, up to a certain amount, and use the money any way you wish. The same considerations apply to home equity loans as with mortgage refinance loans so it's important to understand all the implications. Since it is considered a mortgage, just like your primary mortgage, you could be putting your home at risk should ever be in a position where you cannot afford to pay back the loan.
Borrowers generally obtain personal loans through a bank or other lending institution. They require borrowers to have very good credit and generally have a limit on how much you can borrow. This may make obtaining a personal loan difficult for some borrowers, and if you have a big debt problem, this type of loan may not solve your problems. Personal loans are a good option for someone who is looking to pay off debt quickly and efficiently, but they are probably not an ideal option for those struggling with big balances.
4. Don't wait too long to act
If you have a big credit card debt problem, it's important to address it before it gets out of hand. By waiting, you could potentially limit your options. By being proactive, you will give yourself the best chance of resolving your debt under good terms. Some consumers feel that as long as they are keeping their head above water and making the minimum payment every month, all is well. However, if you are only making minimum payments on your credit cards, you aren't getting anywhere. Minimum payments are not a path to paying off your debt. They maximize the interest you pay and keep you paying for a long time. If you are barely treading water just paying minimums, you are a step away from insolvency and bankruptcy.
5. There are other options besides bankruptcy
If you have reached the point of insolvency and are teetering on the edge of bankruptcy, there are other options to consider before making the decision to file. Bankruptcy is a catastrophic financial event; avoid it if possible. Debt settlement is something any consumer in financial trouble should consider. A qualified debt settlement company such as National Debt Relief can help you negotiate a complete settlement with your creditors. While not fast or easy, debt settlement can help you solve your debt problem once and for all. The goal of any consumer who has significant debt should be getting back to financial health by getting rid of credit card debt altogether. If you are struggling, don't wait for disaster to strike. Get going today on figuring out your debt options.