Before you decide to consolidate debt, you need to be certain that it is the best debt solution for you. While it can be really effective, there are specific debt and financial situations that are perfect for this debt relief strategy.
For someone who has multiple debt obligations, it can be overwhelming to deal with all of these each month. You will feel a lot of stress because of all the different payments that you have to monitor. When you are dealing with several credit accounts, it will seem like you have so many debts. All of these can pile up and cause you to make mistakes – some of which might compromise your financial future.
This is why you need to make sure that you completely understand what this is all about before you decide if this is what you want to use.
There are many reasons to take debt consolidation but you also need to know that there will be instances when you need to consider other options. As great as debt consolidation is, there are specific situations when it will not be the best way to pay off your debts. This is why you need to consider when it really makes sense to consolidate your debts.
When debt consolidation can work
Let us start by identifying when debt consolidation can work in your favor. You can consolidate debt as long as the following checks out.
If you are able to cover your monthly payments
First of all, you need to be able to cover your monthly payments. It may be a strained and limited budget, but you should have the financial capabilities to afford your monthly dues. Even if you are living from paycheck to paycheck, it must be enough to cover everything that you need. This is one of the important conditions of consolidating debt. There is no debt reduction so you need to have a stable income to pay off your debts.
If you can control your spending
Another thing that you need to have is your ability to control your spending. According to reports, an adult spends $300,000 on various impulsive purchases throughout their lifetime. Can you imagine that amount? It can already be enough to pay for half of a new home in cash.
Some people may argue that if they had control over their spending, they would not be in debt. Well, not everyone got into debt because of irresponsible spending. Sometimes, they were just victims of one unfortunate event after another. Or maybe they just failed to save up for an emergency fund.
When you consolidate debt, it will be more tempting to borrow money again. This is especially true if you are consolidating credit card debts. The zero balance of the cards will really be tempting to use.
In case you know that you will have a hard time controlling how you spend, you need to learn to hold back your urges. Keep your credit cards so you will not be tempted to use it. That way, you will not end up taking in more debt.
When debt consolidation might not be ideal
Now that we know the reasons when debt consolidation makes sense, let us identify the reasons when it is not. There are a few debt consolidation mistakes you have to be on the lookout for if you really want to consolidate debt. You have to realize that this debt relief program is not a straight solution. At the end of your consolidation efforts, you still have a long way to go. The payment still has to be completed. This is why you need to avoid these to avoid compromising the effects of debt consolidation.
If you plan to add more charges after consolidation
Some people want to consolidate their credit card debt to remove the balance and give them more room to make purchases. This is a big no-no. When you do this, it will only make your financial situation worse. If that is your intention, you might want to just leave your debts as it is. Do not consolidate. Sometimes, consolidating debts will involve fees – making your debt more costly than it has to be. When you add to your debt, it will add more strain to your financial life.
If consolidating your debt will not improve your finances, you should not go through with it. That will not make any sense. Spending with reckless abandon after consolidating all your debts will leave you stressed out trying to look for ways to meet a higher payment amount every month.
If your income is not enough to cover your expenses
We mentioned earlier that you need to be able to afford your payments because otherwise, consolidating debts will not make sense. This does not involve any debt reduction. If you cannot pay off your basic necessities, much less your debts, you cannot consolidate debt and expect it to be enough. According to statistics, the average income of Americans is $876 a week. If your debt takes up a huge percentage of your income, then you might have to go for debt reduction instead. You might have to negotiate with the creditor or lender to allow you to pay only a portion of your debts and have the rest forgiven.