Household debt in the United States totals over $2-trillion; even more shocking, that total doesn’t include the money we owe on our homes. Consumer debt has become a way of life in our country. How can you get a handle on your household debts?
For many, the answer is debt consolidation. Is debt consolidation a good option for you? Read on to learn the pros and cons.
Debt consolidation fundamentally involves taking all of your debts and consolidating them into a single loan. This often includes home-equity loans, car payments, credit card balances, personal loans and even mortgage debt.
Most banks and other lending institutions have a variety of debt consolidation options. When used properly, debt consolidation should result in an overall lower interest rate and a lower monthly payment. Ideally, this new, lower payment will free up enough money each month to enable you to make the payment on your loan and still live within your income.
Why Debt Consolidation Might Not Be Your Answer
While there are a number of financially wise individuals that utilize debt consolidation as an effective means to manage their finances, this is frequently not the case. For many consumers, the need to engage in debt consolidation is a sign that they may need to learn how to handle their money more wisely.
It is a fact that many individuals that avail themselves of consolidation loans will go out and continue using their credit cards, which now have a $0 balance due to the consolidation.
If you give in to the temptation to continue to use your credit cards, you’re likely to acquire so much additional debt that, before you know it, you’re once again in financial straits. You’ll find that you cannot make both the consolidation loan payment and the payments on your new debt.
Debt consolidation is the very first step in getting your debt under control, but transforming your habits is a critical part of the process, too.
For debt consolidation to have a meaningful and lasting impact on your economic circumstances, you must break the debt habit. It’s important to refrain from spending funds that you haven’t acquired yet.
If You Don’t Have It, Don’t Spend It
One of the easiest ways to minimize your spending is to put away your credit cards. Credit card abuse is one of the leading causes of consumer debt. If you don’t have your cards with you, you can’t use them to add to your debt!
Another easy action is to refuse to take on any new loans. Your debt consolidation loan was obtained to make your debts manageable, so taking additional loans is counterproductive. Remember that “loans” also include anything that will require payment in the future, such as any no payment / no interest deals that come your way.
Your Debt-to-Income Ratio
Continuing to reduce your debt is critical to the long-term success of debt consolidation. Financial experts frequently state that your total debt, including credit cards and mortgage obligations, should not be more than 36% of your gross monthly income. This number is also referred to as your debt-to-income ratio.
The ratio is calculated by simply dividing your total debt payments each month by your gross monthly income. When you pull out the calculator, you may be shocked to find out that your ratio is considerably higher than the recommendation.
As you pay down your debts, however, you’ll see your ratio get closer and closer to the recommended level, enabling you to enjoy feeling more financially secure.
Successful Debt Management
Debt consolidation can be a powerful debt elimination technique, if used properly. Used unwisely, it can only add to your financial challenges. Use debt consolidation as a tool to get your financial life back on track. Then, live within your means to make your consolidation a great success.