Some people fail to realize that debt consolidation is actually a type of debt repayment tool. It is not your actual ticket out of debt. The truth is, it is a step towards debt freedom, but it is not the one that will bring you to the finish line. Understanding this important piece of information will help you approach this debt relief program with the right mindset.
According to reports, more than 2 out of 10 American employees believe that financial wellness means being free from debt. While it may not be the majority, you have to understand the benefits of living a debt free life.
When you do not have debt, you do not have to worry about the stress of meeting multiple due dates. You do not have to think about the charges and fees that will be added to your balance simply because you missed a payment. Instead of worrying about your payments, you can focus on earning more money so you can take your financial position to the next level.
Getting out of debt is not an overnight thing. You need to work hard to get yourself out of debt and you also have to choose the right program that will help you do it. One of your options is debt consolidation.
While it is very effective, it has a couple of risks. This is why you have to make sure that you understand what consolidating debts really mean. You need to approach it with the right mindset to you have the right expectations about it.
Debt consolidation is really a debt repayment tool
The most important thing that you need to remember is that debt consolidation is more like a tool. There are three things you need to remember about it.
It only shifts your debts, not pay for it
First of all, consolidating debts does not mean paying it all off. It may seem like you are paying off your multiple credit accounts but the reality is that you are simply transferring the balance into a new one. None of your debts are paid yet. You still have to start making the payments. Until you do, you practically have the same amount of debt.
It makes the payment schedule more convenient
Another truth that you need to learn about this debt repayment tool is that it simplifies your schedule. Instead of having to deal with multiple due dates, you only have to monitor one. The simplifies payment schedule makes things easier to manage. It is not more convenient to meet your financial obligations if it does not require too much effort.
It gives you the chance to have better terms
Debt consolidation will also allow you to shorten your repayment period – helping you save more money on the debt. Not only that, you can probably get lower fees and charges. If the interest rate of your combined debts is high, consolidating your debts into a new one can also help you lower the interest.
Mistakes to avoid while using the debt consolidation
While debt consolidation will help you improve your financial situation, it is not without risks. If you do not understand this debt relief program completely, you might end up making a couple of mistakes. These mistakes can compromise your efforts to get rid of your debt and can complicate the positive start that you want your finances to have.
That being mentioned, here are the mistakes that you need to avoid when using debt consolidation as a debt repayment tool.
Feeling a false sense of debt freedom
One of the benefits of debt consolidation as a debt repayment tool is its ability to simplify your payments. It combines your debts. That means you only have one loan to pay off. If you have multiple credit card debts, they would now have zero balance since you already transferred the debt into one account. This change can give you a false sense of debt freedom. You think you paid off your debts when in truth, you just shifted it around. You still owe the same amount of money – maybe even more because of the fees that you had to pay to consolidate.
This is an important debt consolidation reality that you need to take seriously. The consolidation is just the first step towards debt freedom. You still have to go through the motions of paying off your debts. Do not feel too complacent because you are not yet out of your credit situation. It is just easier to manage the payments now that you have consolidated your multiple credit accounts. But the payments have yet to be done.
Adding more debt
Another mistake that you can make when using this debt repayment tool is adding more debt. That is more likely to happen if you are feeling a false sense of debt freedom. The credit cards with zero balance can be quite tempting to use. The one payment that you make towards your student loans will make it seem that you have less debt than you thought. This can give you the courage to use credit.
According to reports, American spends the same amount of money on their debt payments, “want” expenses, and “need” expenses. Financial experts believe that consumers should realize that discretionary spending is not really worth the stress that long-term debt payments can bring.
Make sure you hide the temptations that will make you spend using credit. You are not asked to completely turn away from debt. You are only encouraged to stop using it until after you have paid off the debt you consolidated. Ideally, you should pay it all off first. But paying off a significant part of the debt should make it okay to use credit once more. Just make sure you make smarter credit choices from now on.