If you want to make debt consolidation work, you need to have a complete understanding of what it can really do for you. This is a type of debt relief program that can make your financial situation worse if you do not know what you are getting yourself into.
According to reports, the average American owes as much as $38,000 in debt. This does not even include home loans. If you factor that in, you can expect the average debt to rise significantly. If the amount is not alarming enough, you have to know that Americans have multiple debts. All of these have their own due dates and minimum payment requirements. When putting the debts together, it makes the debt situation all the more intimidating and stressful.
Fortunately, there are several debt relief programs that you can use to help with debt. One of them is debt consolidation. Unfortunately, there are some people who make the wrong assumptions about what consolidating debts is really all about. Some people believe that once they enroll in debt consolidation, they are sure that their debt problems will go away. The reality is that it does not work that way. If you are not careful, you might end up wasting your time, money, and effort.
How to make debt consolidation work
To make debt consolidation work, you need to remind yourself constantly that it is a repayment tool. It does not make you debt free. Instead, it will lead you towards the easier path to debt freedom. That means after debt consolidation, you still have to pay off your debts.
Although your original debts seem to be paid off, you are not yet free from debt. You just opened a new credit account that financed the payments. In the end, you still owe the same amount of money. It is just that all your debts are now under one credit account.
A good thing about consolidating debts is that it should be easier for you to meet your monthly payments because you only have one debt. However, there are still a couple of key ingredients that will really make this debt solution work.
Here are a few of the things you need to do in order to make debt consolidation work.
Dedication to keeping up with your payments
Once you consolidate your payments, it becomes a lot easier because you only have one monthly payment to deal with. However, you still need to keep up with the financial obligation. You still have a long way to go. It is important to have the willpower to stick to that payment every single month until you pay it off.
There are a few ways to help you keep track of your payments. One is to consider automatic payments. You lower the chances of missing a payment and you just have to make sure you have enough funds in the account to cover it. You can also simply put reminders in your smartphone or computers a few days ahead of your payment due date so you do not forget about it.
Discipline to not add unnecessary expenses
One of the habits that can affect your debt consolidation program is your ability to stay away from additional debt. When you consolidate debt, there is a huge temptation to use more credit – especially when your debts involve credit cards. When you consolidate your debts, your credit cards will have zero balance. That can be very tempting to use. It leaves you with a false sense of debt freedom and that can be quite dangerous.
This is also not just about new credit that you can borrow. It can even include the charges and fees that will be added to your balance if you end up missing a payment. Make sure you avoid these fees and charges to lessen the amount that you have to pay to achieve debt freedom.
Build up your emergency fund
Finally, if you want to make debt consolidation work, you need to have a backup plan. This will be in the form of an emergency fund. No matter how careful you are in paying your dues in time, you are still in danger of adding more debt. It will only take one emergency event to bring your finances down again. This is why you need to make sure that you have an emergency fund ready. When you need to change the transmission of your car or someone has to take a trip to the ER, you are forced to take on debt. There are scenarios that require immediate funds. What can you do if you have limited resources and most of it is intended for your debt payments? Most likely, you will turn to debt to get out of an emergency situation.
If you want to avoid this scenario, you have to be prepared. You need to save up for an emergency fund. Start with a small amount and consistently contribute to it. Eventually, you will reach enough amount to get you out of tight spots. And even if it is not a big amount, it will always be better than having nothing when you find yourself in the midst of an emergency.
Threats to your debt consolidation success
In your pursuit to make debt consolidation work, you should also consider getting to know the threats that can compromise your success. These debt consolidation mistakes should be avoided at all cost because these have the power to reverse the effects of your debt relief program.
Stretching your finances out too thin
First of all, you have to make sure that you are not putting too much strain in your budget. Although you want to get out of debt as soon as possible, you should never stretch your budget too thinly. As discussed, there is always a chance that you will land in a deep emergency situation that will require finances for you to fix it. If you stretch your finances too thinly, you have nothing to spend on these emergency expenses.
While you have to pay as much as you can towards your debts, you have to leave some breathing room in your budget. Even if it is just a small amount, that can really help keep your debts from making you feel too stressed.
Giving in to family or peer pressure
Your family and friends can have a huge influence on your decisions. USA Today even shares that peer pressure contributes to financial instability. You can make debt consolidation work if you pay close attention to how you react to people around you. One wrong move and you can put yourself in more danger and in deeper debt.
There are a number of ways to make debt consolidation work to your advantage. You just have to stay away from problem areas and focus on the ones that will put you on the right path to debt relief.