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Debt Consolidation – Secrets of Success and How to Avoid the Pitfalls

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Debt Consolidation

It can be pretty galling to find yourself trapped by your own financial profligacy. In such a situation, it is very natural that you vow to never to get trapped by debt again by cutting out all luxuries of life like dining out, going off on vacations to exotic places, buying fancy gadgets, etc. While making lifestyle changes and keeping a check on your habit of swiping credit cards are undoubtedly essential, according to financial experts, you need a more comprehensive plan to eliminate your debt. Debt consolidation that comprises rolling over all your multiple debts into one single loan or credit card outstanding is one of the most popular strategies for getting on top of debt. According to experienced financial counselors, debt consolidation can be extremely empowering from a psychological viewpoint as you can finally manage your debt in an affordable and practical manner. Moreover, according to https://www.forbes.com, since the rate of interest is fixed, you pay the same amount every month making budgeting easier. However, consolidating debt does not work equally well for everyone; the biggest impact comes from consolidating credit card balances that typically carry very high rates of interest. Some secret to making debt consolidation work for you:

Make A Budget That Is Practical

When you are in a debt trap, the first thing that is required to evolve a strategy to escape from it is a well thought-out and realistic budget. When you prepare a budget, you are able to understand how much you earn every month and how much you need to spend on essentials like food, rentals, transport, clothes, mortgages, contributions to the retirement fund and an emergency fund. You also know how much you require paying to service all the debts you have taken on. A realistic budget also takes into account expenses that may need to be incurred infrequently like car repairs, medical expenses or insurance premium payments. To be practical a budget also needs to have some headway for having fun because it is virtually impossible for anyone to lead a life without a little scope for unwinding and letting your hair down. When budgets become restrictive, people tend to fight them off automatically and are inclined to splurge just to throw off the shackles causing the carefully-prepared budget to fail.

Research Debt Consolidation Products

Apart from taking a debt consolidation loan from a private online lender like https://www.nationaldebtreliefprograms.com/, you can scout around for a zero-percent balance transfer card offer that can save you a lot of money in interest. However, these offers are generally available only for those with a good credit score. You can also think of taking a loan from your retirement account to repay all your card dues, however, you need to bear in mind that while the rate of interest is relatively low, you need to repay on time, otherwise, you will be liable to pay income tax and penalties on top of it. You can also explore taking a home equity loan if you have a home on which you have substantial equity but keep in mind that defaulting on the repayments could jeopardize your home. Even if you borrow from a private lender, as long as you have a reasonably good credit score, you will generally be eligible for an interest rate that is substantially lower than the typical credit card APRs. The actual rate that you will be offered depends on factors like your credit score and the amount of the loan.

Stop Using Your Credit Cards

If you want debt consolidation to succeed, then it is absolutely necessary that you bring your credit card use down to zero. Lock away all your cards at home and keep only one with you for real emergencies. However, do not make the mistake of returning your credit cards as you still need to take advantage of the zero-credit utilization ratio to improve your credit score. Sure, you may have to pay annual charges to keep them active but that is a small price to pay in the overall context of things; just be sure to pay the renewal charges on time to avoid late payment charges and the consequent hit on your credit score. Locking away your cards is a part of the commitment you make to keep yourself debt-free. Make a list of all your debts and periodically check the progress you are making to a debt-free life. Every time, you are tempted to use your credit card, you can remind yourself of the list.

Making the Mistake of Choosing Debt Settlement Instead of Debt Consolidation

When you are trying to choose a debt consolidation company to get a loan, you will encounter a lot of jargon and confusing marketing talk by company representatives who may actually be trying to sell you a debt settlement plan instead of giving you a loan for debt consolidation. While on the face of it, debt settlement looks very lucrative since these companies promise to try to reduce your debts by 50% or more, it has serious repercussions on your credit score and can be quite expensive to boot. Debt settlement companies advise you to stop making payments to the credit cards and instead deposit the money in a specially-designated account. When the corpus is sufficient, the company engages in negotiation with the credit card companies to reduce the dues citing your financial difficulties. The negotiations can be protracted during which your credit score continues to get damaged and even when successful, your credit history will continue to report the debts as having being settled for as long as seven years thus limiting further access to credit.

Conclusion

Completing a debt consolidation program successfully can take a couple of years if not more during which, you need to lead a financially prudent, conservative, and disciplined financial life. Typically, most of the attempts to free you from debt using debt consolidation fail because people are just unable to rid themselves of the habit of using their credit cards. As a result of which, not only do they have a debt consolidation loan to be paid off but a fresh pile of credit card debt driving them deeper into a financial mess.

Anna Duke
Anna Duke is a freelance content writer and blogger, she writes on law or immigration. She loves to spend our free time with family.

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