When you are stuck in a credit card debt trap, debt consolidation can seem to be a lifesaver. You can aggregate all your card balances and other unsecured loans into one with a debt consolidation loan carrying a lower rate of interest and a minimum monthly payment that is finally affordable. For the millions of Americans who are slaves to plastic money and carrying total outstanding debt of more than $1 trillion, according to https://www.forbes.com, debt consolidation can represent a practical way of getting on top of debt. However, unless you are savvy about the process and know its various pros and cons, you could easily end up being worse off than before. Some of the most common debt consolidation traps that you need to be extra careful about:
Not Acknowledging the Root of the Problem
The most common reason why people turn to debt consolidation is that their credit card -financed spending gets out of hand and they find it impossible to manage the consequences. While debt consolidation remains a viable debt reduction option, you need to find out why you landed up in the mess that you did because a huge debt does not happen overnight. If you do not address the problems that led you to rack up the debt, it is quite likely that it will happen again very soon despite your best intentions. For debt consolidation to succeed, it is important to make painful sacrifices and changing behavior. It is important not to gloss over previous lifestyle errors and face them head-on so that you can prevent a recurrence. Make a budget to find out where your money is going every month so that you can make the necessary adjustments to your spending. It is important to develop an obsession with monitoring spending regularly and differentiate between need and wants until it becomes a habit and part of your natural behavior.
Not Researching Available Alternatives before Consolidating
There are several ways of consolidating your debt. You can take on a new loan, secured or unsecured, use an existing or new line of credit to transfer outstanding debt, or even take advantage of a balance transfer. If your situation is extreme, you may need to consider options like debt settlement so that the amount of the debts can be reduced with professional negotiation. You can choose to work with a for-profit debt settlement company like NationaldebtRelief.com or nonprofit agency that will engage with your creditors on your behalf to reduce the debt. Very similarly, under a debt management plan, a nonprofit credit counseling agency will work with your creditors to reduce the rate of interest and/or work out a longer period for the loan repayment to make it more affordable for you. You will make the payments to the nonprofit, which will then pay the creditors according to the agreed-upon plan. The agency will charge a small fee for their services.
As is natural, every option has its pros and cons and whether one method suits you better than the rest will depend on your financial situation. It is important to understand what the terms of the arrangement are before you sign on to prevent confusion and disillusionment down the line. Some debt consolidation loans come with steep origination or processing fees, while even the simple balance transfer offer may have a fee attached to it that can significantly change the cost. A credit card balance transfer offer may look lucrative due to the zero or low rate of interest but the offer period may be very small and the interest rate will spike after the promotion ends. You can also pay 3-5% of the amount transferred as balance transfer fees, which may reduce your overall savings significantly, especially when the offer period is small. It is important to understand that paying the minimum amount due on the debt consolidation loan or even the credit card balance will not get you out of debt, especially if you are continuing to use your cards like before.
It is vital to be proactive when choosing a debt consolidation method. Figure out the available options, shop around for the most competitive rates of interest and do not be afraid to negotiate with creditors or lenders for a lower interest rate. You will find that creditors are more willing to accommodate you if they think that their money is at risk because you have lost your job, undergone a medical emergency, or other genuine extenuating circumstances have forced you into a corner.
You Do Not Have a Strategy to Move Forward
Even though you may have picked the best possible debt consolidation plan or are working with a professional agency to get on top of your debt, the real work has yet to begin for paying off your new debt consolidation loan and prepare a plan for the future where you will not be forced to turn to your credit cards for every small emergency. If you do not have an action plan, sooner or later it will get boring to live a frugal life and you will be tempted to binge shopping sprees that can get you down to square one all over again. You need to evolve a budget that has the support of the entire family and which is effective in not only balancing your income and expenditure but also contributing to your long-term financial goals. Budgets can only be workable if you are disciplined and work towards creating an emergency fund that will prevent you from turning to credit cards and a never-ending cycle of debt for meeting unexpected expenses that life throws at you.
Debt consolidation, regardless of the method, is just a mechanism for solving your debt crisis temporarily. The real change that will prevent debt from rearing its ugly head in the future has to come from a relook at your spending habits and making the lifestyle changes that will allow you to live within your income. Making sensible decisions without falling into the typical traps of debt consolidation is the way forward to enjoy better sleep at night.