It is virtually impossible to describe the pain and suffering that extreme debt levels have on individuals and their families alike. For that reason, it is important for anyone dealing with that reality to gain some education on the topic of debt consolidation. The information presented below is intended to help such individuals assess their options with eyes wide open.
Check your credit report. You need to fully understand how you got into this mess to begin with. Checking all three reports regularly can keep you from disastrous financial choices once your debt is consolidated.
Your credit report should be scoured before considering consolidation. The first step in debt elimination is understanding its origins. Know how much you’re in debt and where that money needs to go. You can only fix your problem if you know these things.
Find out whether a debt consolidation company is a “home equity loan” provider in disguise. Some debt consolidation companies really just want you to take out a home equity loan. Don’t let this be you. After all, your home is the most important thing you have. If you find out a company wants you to take out a loan on your home, move on.
If you make the decision to consolidate high interest debts such as credit card balances into a different obligation, do your absolute best not to begin racking up new debt until the consolidated amount is repaid. If you are doing nothing more than moving debts to different places while continuing to spend, you will not reap the benefits that debt consolidation really can provide.
Remember that debt consolidation isn’t for everyone. You’re a good candidate if you have multiple debts like medical bills, credit card bills, personal loans, unsecured debts, collection accounts, etc. Consider your interest rates because if they’re over 15%, you’re paying too much with financial charges every month, which is money that you could save or use for your retirement account. Finally, consider if you have a hard time making minimum payments, have gotten behind recently, or are close to your limits. If these apply to you, debt consolidation may be a solution.
If you need to eliminate debt and feel desperate, you might borrow from your own 401k. Borrowing from a bank or from another financial institution will probably cost you more than borrowing against your own 401k plan. Just remember that taking money from your retirement funds can be a risky action, so make sure you explore the pros and cons before choosing this option.
With the current low home mortgage interest rates, you may be able to refinance your home and take out some of the equity. Be careful to avoid borrowing as much as possible on your new mortgage. If home values should drop even more, you may end up owning a home that is less than the amount you owe on it.
Ask how the debt consolidation counselors are paid. A reputable credit counselor is paid a salary; however, there are many companies that pay through commission. This type of pay should be avoided because the counselors may be swayed by the amount of commission they will make off of your debt consolidation.
You need to consider if debt consolidation is truly the answer to all of your problems. If you don’t change your spending habits, it won’t actually better your future. You have to commit to the process entirely, from saving money for emergencies to not spending on things you don’t really need.
Beware of debt consolidation companies that ask for any sort of fees upfront. This is typically a tell-tale sign of a scam. If you are placed in this situation, leave the situation immediately. This is not the way a debt consolidation company should be doing business, and chances are that your finances are not in good hands.
Think about your long-term financial future. It’s easy to think in the short-term, as debt consolidation helps you almost immediately cut bills you need to pay on a monthly basis, but think about more than that. Ask yourself what you need to do so that your long-term financial picture looks good.
If you decide to consolidate your debts, be smart about the savings. Since you will be paying less each month on those bills, save as much of the excess as you can and put it in an emergency fund. That way, you will be less likely to get into debt in the future because you will have a small reserve from which to draw from when unexpected things happen.
Debt has the ability to cripple life decisions and ruin relationships like almost nothing else. Therefore, when debt levels become truly unmanageable, it makes sense to explore debt consolidation as a potential solution. We hope the guidance provided above helps individuals from all walks of life make wise choices for their own financial futures.