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When you're struggling with debt, and you've had enough, your instinct is likely going to be to take drastic action. You are done being in debt. You want to start the process of getting your finances together, today, right now.
If you're drowning in credit card debt, you're not alone: most U.S. households carry at least $3,946 or more in credit card debt at a time. Source: ValuePenguin
Wanting to move forward while fired up is understandable. However, it's not exactly advisable. Coming up with a strategy for getting out of debt is a long-term game of patience and discipline. You need to carefully weigh your options and come up with the best, most realistic method for sorting out your finances. If you're looking for instant gratification and a quick fix, you're probably going to face a burnout.
That goes double when it comes to debt consolidation. With debt consolidation, you're usually considering the prospect of actually borrowing more money and going into more debt just to get on top of your current debts. It's not a decision you should take lightly.
Therefore, if you're considering pursuing debt consolidation, take a breath and ask yourself the following questions.
Do I really understand credit card debt consolidation?
On paper, debt consolidation seems easy to understand. Through some financial means, you take all of your qualifying debt payments and combine them into a single payment. In the best-case scenario, this payment is significantly lower than the payments you were making before, and it accrues less interest over time, making it a wise financial decision.
However, if debt consolidation is that easy and that beneficial, why aren't more people doing it? There's a lot more to it than just consolidating payments and saving money.
For one thing, the method that you use to consolidate your debt makes a huge difference. Most people think of debt consolidation loans when they think of debt consolidation. In these cases, you work with a lender to get a personal loan large enough to pay off all your debts at once. You then concentrate on paying down that loan over a fixed period.
The hard part is qualifying for a loan with decent rates. Individuals who are in large amounts of debt often also have bad credit scores, which can make it hard to qualify for an acceptable loan.
Balance transfer credit cards also qualify as debt consolidation. With a balance transfer credit card, you apply for a card with a 0% introductory APR and a large enough limit to pay off all your other credit cards at once. You use that card to pay down the other cards and then concentrate on paying that new card down as quickly as possible, ideally before that 0% introductory offer expires and you have to pay interest on your debt again.
The big risk with balance transfer credit cards is, of course, that you then have a credit card. Once you start to pay it off, you all of a sudden have a ton of credit available that isn't going to accrue interest for a while. It can be difficult to resist the temptation to use the credit card, and using it for purchases will only put you more into debt and make it even harder to pay the card off before the introductory APR offer expires.
Other forms of debt relief also share some features of debt consolidation, even though they aren't really debt consolidation. Some debt settlement programs, for instance, ask you to pay a single payment each month into a savings account, which the debt relief company then uses to pay your creditors, in the hope that they agree to a settlement. This isn't traditional debt consolidation, but it shares the most attractive feature of debt consolidation for most people: a single, lower monthly payment that makes your finances easier to manage.
Can I change my spending habits?
While debt consolidation can be helpful for individuals who need it, it can also be a complicated and expensive crutch for people who can't make the most of it. Before you seek debt consolidation, you should ask yourself if you are capable of changing the spending habits that got you into debt in the first place.
This is an important question because debt consolidation is not a solution for your debt. It's a method designed to give you a little bit more space and freedom to deal with your debt appropriately. You still need to take ownership of your debt, make responsible financial decisions, and follow through with a strategy to become free from debt.
The sad fact is that many people who seek debt consolidation actually end up undoing most of the progress they made with their debt consolidation loan. Within a few years, they're deep in debt again and reeling while trying to figure out what to do.
So, if you're considering a debt consolidation loan, consider first the reasons why you got into debt. Did you end up in debt after paying off an unexpected event or emergency? These events are unavoidable, but you can soften the financial blow in the future with a responsible and robust savings plan.
Did you fall into debt because you were living outside of your means? Was most of your debt due to spending for luxury items that you didn't really need, such as expensive clothing, gadgets, and recreational experiences? Did you spend on impulse instead of following a budget? If that's the case, then you need to take a good, hard look at how you spend your money. Overreliance on credit, especially for purchases that you don't really need, is a surefire way to drive yourself deeper into debt.
Once you figure out why you went into debt, figure out what you can do to avoid the same thing happening again, and be realistic about it. Set goals and milestones to establish a concrete guide to better financial habits.
For instance, if you ran up your debt by running up your credit cards, then it's likely inadequate to tell yourself that you won't do it again. You might say that now, but down the road when you have to choose between a night out with your friends and a night in eating noodles, what do you think you'll do?
Rather, you should consider the more drastic step of canceling all your credit cards (barring, perhaps, an emergency credit card that you absolutely won't use unless an unforeseen event arises). While canceling credit cards may harm your credit score in the short-term, it's a much better option than letting yourself run up debt again and wasting whatever momentum debt consolidation gave you.
Can I consolidate all the debt that I need to deal with?
Only certain types of debts are eligible for debt consolidation. Credit cards are definitely the most common types of debt that people seek to consolidate, but people can consolidate other forms of debt as well, such as medical and utility bills.
In general, you can consolidate unsecured debt, while secured debt you cannot consolidate. However, what, exactly, is the difference?
Secured debt is a type of debt that is associated with some kind of collateral. Collateral is any sizeable asset that holds a lot of value, most commonly something such as your car or your home.
With a secured loan, your lender offers you the loan on the condition that you put up this collateral as "security." The understanding is that if you fall behind on your loan or are unable to pay it off in full, then the lender can seize and resell that collateral in order to make its money back.
Secured loans are in play when there's a large sum of money at stake, or if the lender isn't certain about an individual's ability to pay the loan back. Perhaps that individual has a spotty financial history or a bad credit score, neither of which bode well for someone's ability to pay back the lender consistently. Things aren't so bleak that the lender won't approve the loan at all, but it will want a bit of insurance (in the form of the collateral) to minimize the risk.
Individuals receive unsecured loans, on the other hand, based on their creditworthiness alone. Instead of asking for insurance in the form of collateral, the lender looks at an individual's credit score and determines if he or she is a good, reliable investment. If everything looks good, the lender approves the loan based on credit, confident that the individual will have no problem paying it off.
Debt consolidation loans also come in secured and unsecured varieties. Often, secured debt consolidation loans have rates that are more forgiving since the lender knows that, no matter what, it will see some kind of return on investment. You should be wary of secured debt consolidation loans, though. If for some reason you find yourself unable to keep up with your payments (say, you lose your job), then you're risking losing the collateral that you put up. That's a real worst-case scenario. You are still in debt, but now you've lost your home or your car.
Could I pay off my debt on my own?
Have you tried every option for paying off your debt on your own? Or, are you just looking for an easy solution to your financial problems? While debt consolidation can be extremely helpful for people in debt, don't take it lightly. If it's possible to pay down your debt the old-fashioned way, you should try that first.
First, make a comprehensive budget. List all of your fixed essential expenses, such as rent, minimum debt payments, and car payments. Then, list out your variable essential expenses as best you can, making intelligent estimates based on past costs. These expenses include groceries, utility bills, and similar things. Then, take a stab at estimating your monthly income. If you're on salary, then this is easy, but if you're an hourly employee, you'll have to make your best guess.
Add all of those numbers together, subtracting your expenses from your total income. Whatever you have left at the end of the month is the money that you can use to get yourself out of debt.
Next, come up with a strategy for how you'll use that money to pay off your debts. In general, there are two schools of thought when it comes to paying down your debt yourself: the debt snowball and the debt avalanche.
With the debt snowball, you identify the debt with the smallest balance and then focus your attention on paying that debt off first (while, of course, keeping up with your other minimum payments). Interest rate doesn't matter; it should just be the smallest balance out of all of your debts. By paying extra on this debt, you'll eliminate at least one of your debts quickly. Not only will this give you an easy victory to keep you motivated, but it will also free up more money to pay off your next-smallest debt. You then move along to that next debt, and so on, until they are all gone.
You might also try the debt avalanche. With the debt avalanche, you focus on paying off the debt with the highest interest rate first. The size of the balance doesn't matter, just how much interest the debt is accruing each month. Ultimately, the goal is to ensure that the amount you pay each month is actually making a dent in your principal balances and not just going toward interest. Paying off high-interest cards first achieves this goal.
If you've tried to pay off your debts on your own and you still can't get there, then debt consolidation might be for you. National Debt Relief offers debt consolidation services for individuals just like you that might make a huge difference in your life. Don't believe us? Check out our reviews and contact us today to find out more!