In a world where borrowing is easy, it’s no surprise that people will end up with more lines of credit than they can reasonably manage.
Per Gallup data, the overall average of number of credit cards is 2.6. But that jumps up to 3.7 when excluding people who don’t have a credit card. Add three or four credit card balances to a mortgage, student loan, and/or car payment and it’s no wonder why so many Americans become entrenched in debt.
Instead of racking their brains each month about how much they should pay toward each account, some debtors seek debt consolidation options like persona loans, balance transfer credit cards, and home equity loans to simplify their monthly repayments and accelerate their path out of debt.
As foolproof as this strategy sounds, debt consolidation isn’t a miracle fix for large debt.
Let’s discuss five things debt consolidation can’t solve.
Bad Credit
Debt consolidation is a popular tactic because it simplifies monthly repayments and saves debtors money on overall interest. However, that’s assuming that the consolidation loan comes with better rates. A personal loan with friendly interest rates or a balance transfer credit card with a zero-interest introductory period require a good credit score.
If someone’s thinking about debt consolidation as a way to make their lapsed accounts active again, they’ll have trouble securing any offers that save them money if their credit is subpar. In this case, they’d be better off exploring debt settlement negotiations on their own, or using services like Freedom Debt Relief.
Behavior
Many factors play into financial hardship. When it comes to excess debt though, a person’s behavior is usually the main culprit. That behavior doesn’t just vanish with more liquidity. If anything, extra access to funds only fuels it.
If you’re considering using consolidation to gain ground on your balances, be honest with yourself about your level of commitment and discipline. Will it be nose to the grindstone once you consolidate or will the extra money cause you to spill a little back into your lifestyle? If you’re hesitant, don’t take on more debt hoping it’ll solve your problem.
Insufficient Funds
Staring at a minimum balance we can barely afford induces anxiety, but knowing our overall amount of debt can trigger a full-on meltdown. It’s at these moments where desperate things are done in the name of self-preservation. You might buy some breathing room if you’re able to secure a decent loan. Just know that you’re only delaying the inevitable if you’re not earning enough to make any headway.
Quicker Debt Resolution
Aside from declaring chapter 7 bankruptcy, few debt scenarios resolve quickly. If you expect the opposite out of debt consolidation, you’ll surely be disappointed. This is because debt consolidation is really just a refinancing. A debtor exchanges the terms of their various accounts for a new loan with its own interest rate and terms. Any time a debtor refinances a loan to a lower interest rate, they lengthen the payment lifecycle, and thus their time in debt.
Lack of a Plan
Can’t figure out how to make monthly payments efficiently on five different accounts with varying minimums, principals, and interest rates? You’re not alone. This is precisely the reason many people turn to consolidation methods in the first place.
Reducing multiple monthly payments to one certainly creates less of a headache, but it doesn’t bring a debtor any closer to financial freedom. What does is committing to a specific repayment plan and sticking to a budget. Just because a consolidation loan comes with longer payment terms doesn’t mean you can’t pay off your debt faster. Consider tweaking the debt snowflake approach to your purposes. The snowflake strategy focuses on capturing small, regular savings windfalls and applying them to the principal balance immediately instead of waiting for the monthly bill.
Every financial scenario is different. Likewise, no specific financial strategy is ever a uniform solution to solving personal debt. Debt consolidation can make a difference if the terms make sense, the income is there, and a debtor is committed for the long haul. These aren’t small ifs, though. If you’re thinking about debt consolidation, make sure the advantages suit your situation. Otherwise you’ll only make your problems worse.
