| It Does Not Always Make Sense To Consolidate Debt - Here is Why |
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| Written by Chris Blanchet |
| Thursday, 23 July 2009 09:42 |
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It may seem contradictory, but just because you consolidate debt, it does not mean you are fixing your finances. This is particularly true if you use those low/no-interest checks that come with other credit statements. At least for the most part, anyway.
It may seem contradictory, but just because you consolidate debt, it does not mean you are fixing your finances. This is particularly true if you use those low/no-interest checks that come with other credit statements. At least for the most part, anyway. Be Wary of Low Rate Offers In reality, if you consolidate debt with low-rate offers the expectation is that you will continue to carry a balance long after the special rate period has passed. The creditors know this because they invested a lot of money into analyzing such information statistically. If you decide to consolidate debt this way, make sure 100% of the balance is repaid before the expiry date as many of these creditors make note in their fine print that they charge extra fees or the full interest at the regular rate. Will Debt Consolidation Help Sadly, people who have no choice but to consolidate debt will have been led to such a decision based on reasons that are already showing up in their finances or on their credit report. This means they no longer have an ability to make their existing payments or they have already made some payments late. When a lender looks at such an application, even if it is to consolidate debt, they will see an inability to service the debt and/or a deteriorating credit score. The resulting loan, if granted, will therefore come at a higher rate and possibly even a higher payment. What Do I Do Now? For debtors who are still solvent (they earn more than what they need to pay out), it comes down to how badly they want to improve their situation. In many cases, it doesn't make sense to consolidate debt through a loan. Instead, this may often mean developing and sticking to a debt repayment program that will not only improve the debt load, but their credit score as well. What If I Am Not Solvent? In those cases where monthly income cannot meet the bare minimum in debt, housing, and living expenses, you do not need to consolidate debt. Rather, you need to seek the advice of a State-qualified credit counsellor who will make recommendations and work on your behalf after reviewing your financial circumstances completely. Of course, this does not apply to people who are experiencing temporary reductions in income, such as layoffs, vacation, etc., where normal income levels are known to return. Where Do I Start? You can start by determining just how severe your situation really is. Get a copy of your latest credit report and see if your score has been impacted. Learn a little more about debt management and calculate just how simple/difficult it would be manage your debt better. If your only option is to consolidate debt, consider that not all loans are create equally. In fact, the odds are on the creditor's side as far as low-rate, time-limited specials are concerned. And those consolidation loans usually end up having a negative impact on your personal finances rather than positive. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Chris Blanchet has more than 16 years of experience in the financial services industry and has helped thousands of people fix their finances. He is the author of the debt management program, Help Fix My Finances. He also contributes regularly to the Debt Management site, Debt Consolidation Opinions.com. |