Total revolving debt, mainly credit card dues, has touched $1.04 trillion in America, which is a record from the 2008 peak. This mammoth figure is despite the soaring cost of debt, which at 15.5% is up by 300 basis points from the corresponding figure five years earlier. In a country that is a slave to consumerism, it will not surprise people in the know that in just 12 months, American credit cardholders have paid an astounding $104 billion in interest and fees. According to a forbes.com report that puts out these rather alarming figures, this figure is a whopping 35% more than what it was five years ago.
While these figures may thrill economists, it actually represents the mindboggling misery of millions of cardholders, who are caught in debt traps of their own making, due to their profligate card swiping habits and the habit of spending far more than what they can afford. If making changes to your lifestyle and attempting to save more to pay off the credit card debt have not proved successful, it may be the right time for you to examine debt consolidation as a strategy to resolve your financial situation. Simple as the method is of obtaining a new loan for paying off existing card dues, it can be very easy for novices to commit certain common debt consolidation mistakes that can render the effort fruitless and leave you frustrated and perhaps in a worse financial situation than before. Here’s what to watch out for:
Assuming Debt Consolidation Is the Best Route of Resolving Debt
Just because debt consolidation is widely advertised by private loan companies as the ultimate solution to resolving the debt burden, it is not necessarily always so. There are a number of other methods like credit counseling, debt management, and even bankruptcy that can be used depending on your specific financial circumstances for better results. It is important to examine all possible methods so that you can make the most appropriate selection. If you are unsure, it can be a good idea to consult a financial counselor who can suggest the best method for getting on top of debt.
Not Researching Debt Consolidation Loan Providers Adequately
You should know that even as there is intense competition among the private debt consolidation companies for business, there are a lot of lenders who are just waiting to lure unsuspecting customers into their fold and rip them off with high APRs disguised as various charges and fees. It is very important that you deal only with companies that have a very good reputation in the market such as nationaldebtreliefprograms.com so that you can be fairly sure that they will not have practices that are unfair. Apart from the rate of interest, you should carefully check out the terms of the contract to ensure that there are no nasty surprises lurking within.
Starting to Use the Credit Cards Wildly Again
When you consolidate your credit card debt, you take on a new loan to extinguish all the existing dues and your credit cards now have zero dues on them. Often, for many people, this is a very powerful temptation to start using their credit cards once more and they pile up debt that they cannot repay with their incomes. In fact, the single largest reason why debt consolidation becomes a failure for people is this inability to restrict the use of the credit cards after paying them off. If you want to get out of the debt trap, you will need to be financially disciplined, restrict your lifestyle spending, and ensure that you lock away all your credit card except for one that you reserve for emergency use. It is not a good idea to close all your credit cards as you will lose out on the benefit of having a minimum credit utilization ratio that is important for boosting your credit score.
Not Including the High-Interest Debts in the Consolidation
Perhaps the biggest advantage of consolidating your credit card debts is that you get the opportunity of retiring the high-interest debt with a loan that carries a much lower coupon rate. If you have a good credit score, the difference between the interest rate charged by the card companies and that on a debt consolidation loan from a private lender can be quite substantial. Over a period, it will mean that you will be able to save a lot of interest expense. However, for the maximum benefit, you will need to ensure that you have included all the debts that carry the highest rates of interest and also check that you have not included any debt that may actually have a lower rate of interest than the new loan.
Failing to Check Your Credit Reports
The rate of interest that you will be able to get on your debt consolidation loan largely depends on your credit report. It is a good idea not to take your credit reports for granted but to get a copy from each of the three leading credit bureaus and check them for accuracy. If you find something that is inaccurate be sure to report it and get it rectified before applying for the debt consolidation loan. If your credit score is poor, you should not waste time applying to banks and credit unions but instead focus on private lenders who specialize in lending to customers with similar profiles. Remember that if you have a poor credit score, getting a decent rate of interest may be very difficult so you may not be able to achieve any significant savings on the interest front, however, the other benefits of debt consolidation will still accrue.
When you have clocked up a huge amount of debt on your credit cards and are finding it difficult to make the monthly payments either because they are unaffordable or simply because there are too many credit cards to keep track of, debt consolidation can save you from a lot of stress. However, unless you do it right and are disciplined enough to stick with the program till you wipe off your debts; it can rebound in your face and leave you worse off.