Debt consolidation programs can be an effective way to free yourself from the clutches of debt. If you look at the current debt situation of the country, you will realize that a lot of consumers are in need of an effective debt solution. The Federal Reserve keeps track of household debt and as of the 2nd quarter of 2019, the total debt reached $13.86 trillion. This means the debt grew by $195 billion after just one quarter. The debt has grown so much that it is already higher than the consumer debt back in 2008.
With the signs pointing towards another recession, you need to make sure that your debts will not make things harder for you. During the Great Recession, people got into a lot of mess because they had a lot of debts to deal with. When their source of income was compromised, it forced them to lose everything they have worked hard to build. Their debts demanded to be paid and it left them in a huge financial problem.
Fortunately for you, there are debt consolidation programs that you can use to make debt payments easier. However, you need to make sure that you understand completely what this program can really do for you. What you know about the debt solution you will choose will give you a clearer picture of how it can improve your financial situation.
5 important truths about consolidating debts
Consolidating debts involves the combination of your multiple credit accounts. The goal is to have just one monthly payment that hopefully, has better terms like a lower interest rate and lesser fees.
Before you assume that this is the perfect solution to deal with your debt issues, you might want to get to know the 5 important truths about debt consolidation programs first.
It is basically a refinanced loan
One of the ways to consolidate debts is to open a new credit account that you can use to pay off your multiple credit accounts. This is like refinancing to consolidate your debts. Some people may not think that it is a good idea to use debt to pay off another debt. However, it can make sense if you can get better terms on the debt. For one, it will simplify your payments because you now just have one monthly payment to track. It makes the debt relief process less stressful. Not only that, if you can get lower fees or interest rates, that will help you save money.
It does not guarantee a lower interest rate
While the goal is to get a lower interest rate, this will depend on the debt consolidation programs that you will use. If you will use a personal loan to combine your high-interest credit card debts, then the lower rate is possible. However, if you opt for debt management, the credit counselor cannot guarantee a lower rate. They will do their best to negotiate for a lower rate. But this will not be guaranteed.
It will not eliminate your debt
It is also important to note that debt consolidation programs will not eliminate what you owe. The original debts will be paid off when you refinance the multiple debts into one loan. That means you just transferred your debts. You still owe the same amount as before you consolidated your debts. You see, debt consolidation programs will simply act as a tool that will restructure your repayment plan. The payments will still come after the consolidation is done. You still have to make the monthly payments. Whether it will take a long or short time, that will depend on the new repayment plan.
It cannot reduce what you owe
Another truth that you need to know about debt consolidation programs is that it will not reduce the amount that you owe. At most, you can get a reduction on the interest rate and you can negotiate to lower the fees and charges. But both of these are not guaranteed. If you know that you cannot afford to pay off all your debts, consolidating it might not be the best solution for you. It may be better to opt for debt settlement if you want to reduce your balance.
It can put you in debt longer
Finally, debt consolidation programs can put you in debt longer. This will depend on the strategy that you will use. If you want a lower monthly payment, you will need a longer repayment plan so your debts will be distributed over a longer period. But if you prefer to get out of debt faster, you need to pay more. The more you pay each month, the more you can save. So this really depends on how much you can afford in terms of debt payments.
One thing debt consolidation programs cannot change
While debt consolidation programs can bring a lot of improvements to your credit situation, there is one thing that it cannot do.
Debt consolidation cannot change your behavior with money.
Most of the time, our finances take a turn for the worse because we do not know how to manage our money wisely. It is not how much we make that will influence our financial success. It is more of how you use that money that will define if you will be a success or not.
Of course, your income will still be important in keeping you out of debt. But if you cannot do anything about your current income, you need to ensure that you will only spend what you can afford. Lower your lifestyle if you have to. Unless you change your behavior about money, there is a high chance that you will land in the same debt situation.
Here are some tips that will help you change your money behavior so you will no longer need debt consolidation programs in the future.
Understand the behavior that led you to debt
There is usually a specific behavior that led you to debt. Obviously, it is overspending. But what led you to overspend? Was it your lack of emergency funds? When an unexpected happened, you had to rely on debt to get you through tough times. Another reason is having the urge to always have the latest things. You need to analyze and reflect on what you did wrong so you can make the necessary changes that will ensure it will no longer land you in debt.
Change your belief about money
You should also try to identify the deep-seated money beliefs that you grew up with. Sometimes, these are the beliefs that we grew up in. Research reveals that how our parents handle their money influences how we manage our own. You may want to go back to what you remember about how your parents managed their finances. It may give you clues about the money beliefs that you now have. In case you have the wrong money beliefs, you should try to correct it and develop new ones.
Know the habits you need to develop to manage money better
Finally, you should make sure that you know the right money habits that will allow you to take care of your finances. That way, there will be no need to use debt consolidation programs to get out of debt. Among the habits that you can learn includes saving, budgeting, smart spending, and even investing. Hopefully, when you have the right money habits, you will learn how to make better financial decisions that will lead you towards a better state of personal finances.