4 Reasons Why Debt Consolidation Will Not Work

4 Reasons Why Debt Consolidation Will Not WorkThere are pessimistic people that will quickly point out that debt consolidation will not work and you would be better off sticking to your regular payments. They would rant off about how ineffective the program is and that it did not really help them out. Their debt situation is still the same and for others, even worse than when they started the program.

It might sound like a black propaganda from the point of view of consumers who benefited from the program. For those that are still considering the repayment tool, it could be enough for them to start looking somewhere else. However, there is some truth to why debt consolidation would not work for some people.

It is important to take note of your current financial situation as well when considering debt consolidation. It can help you understand if the program is a right fit for you or not. That being said, here are a few of the reasons why

If your income cannot cover existing debt payments

A debt consolidation program basically combines all, if not most of your debt payments under one account. What you get out of the program at the beginning is convenience. Rather than spreading yourself out too thin attending to different debt payment accounts, you get to focus on just one payment account.

However, if you are already having a hard time meeting your payments simply because you are not earning enough, it might not be the program for you. Debt consolidation will not work if you are trying to lower down your payment to make ends meet. Yes, it is possible to lower down your payment with it but it might not be enough.

What you need to look out for is increasing your income or looking for ways to lower down your expenses. You can try to monetize your hobby or take on a second job. Why not ditch the cable as well and just stream the movies you want to watch? You can also bike to and from your place of work to save on gas.

If you have an impulsive buying behavior

Another instance where debt consolidation would have a hard time helping you is if you have an impulsive buying behavior. This is not an easy characteristic to deal with and addressing the issue can take some time. This is why debt consolidation will not work for you if you keep on accruing debt as fast as you pay them down.

The problem would start as soon as you consolidate your debts. If it is for your credit cards, you would be transferring your balances on one card. Once your other credit cards reflect zero balances, you might start to buy things left and right again. Sooner or later, you would find yourself back in debt in addition to your consolidated loan.

If you know for a fact that you have an impulsive buying behavior, you need to address that issue first. Look at what triggers your behavior and do something about it. If you have a weakness when it comes to online shopping, do not save your credit card information online to make it a little harder to quickly make a purchase. Try to control your emotions and stay away from temptations.

Debt consolidation will not work if you believe the program is a way to free up credit

Similar to the situation above, debt consolidation might be a challenge if your main objective is to free up credit. This begs the question why you want to do it in the first place. If you just want to start with a clean slate, you are better off paying your balances down. If you need to free up credit on some cards to be able to shop, then this is not a smart idea. Especially when you realize that American households carry an average of over $137,000 in debt according to USA Today.

You need to understand that once you consolidate your debts like in your credit cards, your balances does not go away. They are just on a different account. If you start charging purchases again on your cards, you are just putting yourself in bigger trouble. As you try and make payments on the consolidated loan, you will have to make payments on the new charges as well.

If you plan close old cards to resist buying temptation

You might want to cut up old credit cards because you want to curb your unnecessary spending. This is a noble goal but the end simply does not justify the means. Especially when you start talking about your credit score. Debt consolidation will not work if you have the wrong objectives in mind. It can even put you in a worse financial situation.

One of the bad side effects of cutting up and closing old credit cards is that you lose the payment history attached to it. This is one important factor credit reporting bureaus use in computing for your credit score. The longer payment history you have, the better it is for your score. One thing you can look into is to just keep them without having to close them. You can use the cards from time to time but remember to pay the whole amount once the statement comes in.

How debt consolidation can help your finances

Now that you have an idea why and how debt consolidation will not work for your finances, here are a few of the ways it can actually help you.

It gives you the chance to focus on other areas of your finances

Once you consolidate your debt, you essentially combine them into one account. Once that happens, you now have the chance to focus on other areas of your finances. Rather than losing all the time trying to monitor and send payments out to different lenders, you can now use that time to try and increase your income. You might have enough time now to earn off of your hobby or simply take on a second job.

It allows a lower monthly payment

This is one of the benefits of debt consolidation but it should not be your ultimate goal. As your monthly payment goes down every month, you can now extra funds into other accounts. Why not consider beefing up your reserve funds? The more you have in your emergency account, the better you can handle unexpected situations in life. You can add to your retirement fund so you can retire earlier.

It can give you a lower interest rate

If your credit score has improved over time, debt consolidation could yield a lower interest rate. This means that your payment for your consolidated loan can be lower without having to stretch the repayment period. This means you get to pay off your debt a lot sooner and you get to save money on interest payment as well.

There are instances when debt consolidation will not work for you especially when you have the wrong motives. It can put you in a more serious situation and getting out will be more challenging. Debt consolidation is one of the most useful repayment programs out there. You just have to make sure that you are doing it for the right reasons so you do not put your finances in more peril than it already is.