Debt Consolidation Is Helpful For Many, But Not All
A large number of people find debt consolidation effective for getting debt relief, and often, these cases turn out to be financially advantageous for them. But sometimes, debt consolidation isn’t the best method of debt relief, either because of the credit implications or because it doesn’t provide enough relief to fully turn around one’s financial circumstances.
To provide you with a stronger understanding of whether or not debt consolidation can work for you, we’ve put together this article that covers the potential ways that debt consolidation might or might not work for you depending on your current financial circumstances.
After Consolidating, Interest Rates Might Still Be High
Debt consolidation is one way people can get relief from high-interest debts. By negotiating down interest rates on your debt, you can become debt-free much faster, resulting in paying less overall to your creditors.
This is all good for getting out of debt but has the potential to create a false sense of what type of interest rates you truly qualify for. Consolidating debt won’t necessarily boost your credit score and may even lower it temporarily, so it’s important to keep in mind that you might not be able to access the best rates right away.
It could take many months of reestablishing your ability to keep credit utilization rates low before you can get approved for lower interest rates. Because of this, consider carefully which method of debt consolidation you pursue if you plan on purchasing a home or car in the near future.
Your Monthly Expenses Are Too High Even After Consolidation
If you are struggling every month to make ends meet, reducing your debt payments with a debt consolidation might not be enough to get you back on track. For example, home loans can’t be included in a debt consolidation program.
So, if you happen to have a high mortgage payment but recently suffered a pay cut, there’s a chance consolidating credit card debt won’t provide a big enough reduction in monthly expenses to provide ample financial breathing room.
One way to gauge whether or not debt consolidation makes sense for you is to calculate your income-to-expense ratio. If the percentage of your income that goes to expenses exceeds 75%, there’s a high likelihood that debt consolidation alone won’t be enough to turn your financial situation around long-term.
If this is the case for you, beyond simply spending less or earning more, utilizing more rigorous forms of debt relief might be your better option, such as debt settlement or possibly even bankruptcy if there’s little chance of earning more anytime soon.
Taking On New Debt And Undoing Progress
The unfortunate truth is that when you’re struggling financially, sometimes there are few options for meeting your needs besides using a credit card. If you’re able to consolidate your debt to a lower payment but are still struggling to pay for essentials, the pressure to use your newly balance-free credit cards can be tremendous.
In these situations, it’s wise to use strategies designed to help you resist the temptation to use credit cards. The most extreme of these is cutting up your credit cards and erasing the numbers from web browsers to limit your ability to use them again.
If there’s a chance you might need to use a credit card for an emergency like a car breaking down, some people suggest giving their credit cards to a trusted friend or family member for safekeeping. This can provide a powerful social incentive to stay on course with your financial objectives.
Changes In Life Circumstances
Part of life is that changes can happen when we least expect it, disrupting our financial lives and ruining our debt relief plans. When there’s a serious change to your income or health situation, it can make well-intentioned plans for debt repayment impossible.
Being Unable To Maintain Your Debt Consolidation Plan
Keep in mind that debt consolidation is not an easy overnight solution. Debt consolidation programs often require an increase in financial discipline along with patience to become debt-free. Debt consolidation requires on-time monthly payments, so being absolutely certain you can keep up with them for the long haul is crucial to success in becoming debt-free.
It’s wise to carefully scrutinize your budget to uncover any opportunities you may have to reduce your bills before starting a debt consolidation program—and then sticking to that budget.
What Are Your Options For Debt Consolidation?
Using A Debt Consolidation Loan
If your credit isn’t quite good enough for getting approved for a lower-rate balance transfer to a new credit card, this might be one possibility for debt consolidation. This strategy can also improve your credit composition if your debt is mostly made up of credit cards because a consolidation loan will often show up as a personal loan on your credit report.
The main benefit of a debt consolidation loan is that it can provide a relatively quick boost to your credit score by lowering your credit utilization rate by moving your credit card balances to an installment loan.
Consolidating Debt With A Debt Settlement
When it’s unlikely you can improve your income situation anytime soon, it might be better to go with debt settlement instead of a debt consolidation loan. With debt settlement, you negotiate with your creditors to cut down your balances in return for repayment in a lump-sum or structured payment plan. The biggest drawback to this approach is that you’ll usually have to close the accounts you settle, potentially dragging your credit score down for some time.
Planning To Consolidate Your Debt? Call Alleviate Financial First!
Alleviate Financial Solutions can help you better understand what the next best step is for your financial future. Whether it be debt consolidation, debt settlement, or bankruptcy, our seasoned team of debt relief experts will help guide you through the steps necessary to finally become debt-free.
Contact the debt consolidation experts at Alleviate Financial Solutions today to learn what your options are!