Monday, April 10, 2017

Should You Consolidate Debts?


When you find yourself facing debt, it can feel like an uphill battle. There’s so much to do, so many decisions to make, and a serious impact on your lifestyle habits. You’re going to have to change the way you spend and combat the problem once and for all.

Every month, your wage will hit your account. It will then undergo the process of being depleted. Every creditor will get their share, before you have even had the chance to siphon off money to pay your bills and expenses that month. The leftover expenditure, yours to do want you want with, is so small and cannot be topped up by credit card usage anymore. Everything has got to change, from the small to the huge, reevaluating your relationship with money at every turn. It’s going to be a rough ride back to financial solvency, with many changes and lessons you are going to have to learn along the way.

Or are you…?

The Promise Of Consolidation

In theory, the practice of consolidation is a tempting one. You can sweep away all those debts into one pile, bundled neatly into one monthly repayment. It’s simple and easy - it will even free up space on your credit cards.

And you can sweep so much up into it! Not only do your regular payments to credit cards get snapped up, but you can get rid of anything you want into that single monthly payment. You could say goodbye to the student loan hanging over your head, wipe off the store cards, even settle I.O.Us given to friends and family if you see fit.

Of course, you will tell yourself, you have learned your lesson. The credit cards will be available only in the case of an emergency; you won’t rely on them as a way to top up your wage anymore. They won’t be habit; you’ve gone wrong with that kind of thinking before, and of course, you’re not going to fall into that trap again. They’ll just be useful in the case of an emergency. It’s also going to make a big difference to your life not to have to cope with bad credit; if you go down the consolidation route, most of your credit score will survive unscathed.

It seems like the perfect option; the solution that you have been dreaming of.

Or it could just be the beginning of another nightmare.

Why Consolidation Isn’t The Easy Choice

While consolidation offers many advantages, such as those listed above, nothing in life is that easy.

The biggest problem comes from the fact that you don’t learn much from the process. Everything is swept up and away from you; ironically, the thing that makes consolidation so attractive is its downfall.

If you’re not extremely careful, you could find yourself in five years time looking for more consolidation. The most important part of dealing with debt is learning what got you into the situation in the first place.

Is It Always Bad?

Before we go into detail, it’s worth taking a pause and considering if consolidation is always such a bad idea. In some scenarios, it’s actually the perfect solution without any of the warning signs. Examples of times when consolidation would be beneficial are along the lines of:

  • If you have a singular debt, which you can incurred due to circumstances beyond your control. This is the kind of payment you have to make that you can’t plan for. An example would be a friend or relative becoming unwell, and you needing to spend money on flights and accommodation to go and see them. No household budget in the world would have been expecting that kind of event, so it makes sense you relied on debt to get through it.
  • The debts are due to a factor that no longer exists. For example, if you took a break from work to improve your education, then it’s natural you will have wracked up some debt in the process. If you are now returning to work and will be bringing more money in, and are confident you can meet the monthly payments, then it makes sense to keep everything in one simple bundle.

The above are examples, but the general rule for consolidation is that it works for single debts or debts that occurred due to a specific circumstance. If that applies to you, then it’s definitely something worth considering.

Where it doesn’t apply is where there is no single debt, no solo purchase, no event that prompted you to rely on credit cards to see you through to the end of the month. This is the kind of spending that tends to be chronic; it becomes a habit, as if the credit cards are an extension of your wage, and you rely on them in much the same way every month.

It’s this kind of habitual spending that is so dangerous for consolidation.


How Can You Avoid The Risks?

Consolidation can give you a fresh start, but only if you let it.

You have to let consolidation be the end of the line, the point you can’t turn back from. It makes sense to keep a single credit card in case of emergencies, but for everything else - store cards, catalogs, other cards - then they have to bite the dust.

You have to change your spending habits, going as far to investigate their emotional causes and discover what causes you to overspend.

If you just go back to your same old lifestyle, then the same old debt is going to begin to creep up again. The only way to avoid falling back into this pattern is if you see consolidation as the end, not just another way to begin spending again. It is a viable choice that can do a lot of good for your financial life, but only if you commit to it. If you don’t, you’ll likely end up in the same situation all over again.
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