Prioritizing debt consolidation may seem like a good idea if you really want to improve your financial situation faster. However, you need to understand that it is only applicable to certain situations. Yes, there are situations when paying off all your debts at once is not a good idea.
Do not get us wrong. Getting rid of debt is generally a good idea. But you have to realize that there are instances when it will only make other financial goals harder to reach or it will cost you more in terms of penalties and charges.
While this is a reality of prioritizing debt consolidation, that does not mean there are no people trying to pay off their debts as soon as possible. In fact, one survey revealed that 66% of their respondents considered paying off debt as a priority. This was even greater than the need to fund their children’s college fund or their retirement savings.
It is true that the personal finances of every individual will vary. So if you really want to prioritize your debt payments, that is up to you. But to make sure that you can maximize the benefits of your chosen debt relief program, you need to understand how debt consolidation can affect your overall financial position.
Important rules when prioritizing debt consolidation
As you are prioritizing debt consolidation, you need to get to know how it works completely. First of all, the consolidation means you will be using credit to pay off all your original debts. This will basically combine all your balance under one credit account. If you do it correctly, you will even get better terms – that means a lower interest rate and no fees.
Given these changes, you need to analyze how that will affect your current financial position as a whole.
Paying off credit card debts
Definitely, this will have a positive effect on your credit card debts. This is the type of debt that has the highest interest rate. If you can get a lower rate, it is possible for you to save a lot of money. Not only that, it may even be possible to get rid of credit card debt within the year.
So prioritizing debt consolidation for credit card debts is actually a good idea. This is a debt that you do not need to think twice about paying off immediately. The longer it takes for you to pay it off, the more damage will bring to your financial situation.
But what about your emergency fund? Well, you can prioritize credit card debts over this but you might want to have at least a couple of hundred dollars in your fund first.
All the other debts
Now, what do you do for all the other debts that you owe? Debts like your mortgage, car loans, personal loans, medical bills, and even student loans. Will prioritizing debt consolidation for these debts be a good move?
That depends on a couple of things. First is the prepayment penalty. If you will be required to pay a lot, you might want to reconsider prioritizing debt consolidation. But if you really plan to use your home in debt consolidation, that could work. As long as you have enough equity to cover all your debts and you have a good credit score to get the lowest interest rate, then you should be okay. You can opt to prioritize your debt payments. The same is true for the other debts that you owe.
You should also ask yourself if you will save more money if you pay off the debts now or if you just use the extra money to invest. If you will save more by investing, it might be a better idea to not prioritize debs for now.
Another consideration is your emergency fund. If there is no immediate need to really pay off your debts for now, it might be better to prioritize saving up for your emergency fund. Once you have enough in this fund, you can already start prioritizing debt consolidation.
Dangers of prioritizing debt consolidation
The thing about putting your debt payment first is it will limit your money. This is why you need to be careful about choosing what you should prioritize.
According to reports, 72% of parents reveal that paying down debt is their top priority right now. In particular, they want to make debt management a priority. As you get older, you will use debt and the chances of you having a lot of them will be very high. This is probably why prioritizing debt consolidation is popular among young parents. This is the time when they invest in their home or when they start spending more because of their kids. When you want to build a stable future for your kids, you need to put all your debts in order.
But prioritizing debt consolidation, even if you want to do it for your future also poses a couple of dangers. Here are some of them.
Insufficient emergency fund
Regardless of your financial situation, you need to make sure you have enough emergency fund. Unless you have enough of this, do not prioritize your debt payments. Otherwise, if there is an unexpected situation that happens, you might end up borrowing again.
Inability to save for retirement
Another reason to not prioritize debt consolidation is when you do not have enough retirement fund. As you get older the need for a bigger retirement fund is a must. You have a shorter period left to save up for it. Starting early is a good idea – even if it is only a small amount because you can take advantage of the compound interest. The earlier you start, the more you will benefit from the growth brought about by the compound interest.
Passing up an opportunity to invest
Finally, if prioritizing debt consolidation means you are passing up on an investment that will make you earn more – then it might be beneficial to think twice about your options. If you will not really gain anything by paying some debts in advance through debt consolidation, then might as well leave it as is. Then you can find the extra funds to grow your personal finances.