According to NerdWallet.com, the average american household debt stands as follows:

– $15,863 in credit card debt
– $156,584 in mortgage debt
– $33,090 in student loan debt

So it is easy to see why Americans are looking for easier ways to manage their debt. It can be easy to let our debt consume our lives and weigh on our minds every day. Consumers are looking for options and is debt consolidation. But is it the right option?

What is Debt Consolidation

Debt consolidation consists of combining all of your insecure debts into one single monthly payment. You take out on major loan to payoff all of your existing loans and debt. So instead of having several different payments and interest rates, you have one single loan payment and interest rate. You will send one monthly payment to the debt consolidation company, and that company will divide the funds properly.

This seems like an easy fix to all of your debt problems. Most feel like this debt management system will get them back on track and help monitor their financial problems.

While it may be beneficial for some, trying to justify why you would consolidate credit because of the convenience of a single monthly payment or reducing interest rates can erupt many other problems. There is no quick fix to paying off or managing your debt.

Is Debt Consolidation the Quick Fix You’ve Been Looking For?

So before you consolidate your debt, lets look at the pros and cons to consider:

The Bright Side of Consolidating Your Debt

Turn multiple payments into one. There is not doubt that debt can become overwhelming. It can be difficult to keep track of each monthly payment or at which time each can be paid. Consolidating your debt allows you to make only one monthly payment and make your debt more manageable.

Lower your interest rates. Each of your debts has an interest rate. Like Robert Palmer consistently states, it is crucial to know all of your numbers. He even made it one of his Saving Thousands Rules. When you really sit down and assess how much you are paying in finance charges, you might be blown away. With only one loan payment a month your interest rate can be drastically reduced.

A lower monthly payment. All of your monthly payments can add up. It happens to us all of the time, we get our paycheck and it is gone in a flash to all of our debt payments. With just one payment, you can lower the cost that you spend monthly in paying off your debt.

Why to Take Caution on Debt Consolidation

It could be an enabler. We get into debt for many reasons, but one main reason is we spend more than we have. Don’t get me wrong, it is hard not to. But we develop bad spending habits or become financial zombies. We stay on auto pay, don’t manage our budget (or even create one), and we live paycheck to paycheck when we don’t need to. Putting all of your debt into one easy payment can give us the illusion that everything is ok, when of course it is not.

You will have a lot of your funds freed up and this could mean big trouble. If you are going to travel this path, it is important to have a plan and realize your situation. If not, it could be an endless circle.

The length of the loan. I understand that the interest rate is much lower and so is the monthly payment, but that could mean you take even longer to pay off your debt. The longer you continue to pay in small increments the more interest you will accrue. You may be paying more in the long haul just by taking more time to pay off your debt. It can be a slippery slope.

What you Can Do Instead of Consolidation Your Debt

Know your numbers. It is still astonishing how many individuals do not know their interest rates, credit card balances, and even monthly payments. We get suckered into auto pay and electronic billing that we think they are taking care of themselves. This is called being a financial zombie. Yes, you read correctly. A financial zombie!

Take the time to analyze all of your debts, their interest rates and your monthly payments. You could find that with some small adjustments you can pay off your debts much quicker.

Create a budget and schedule. To truly manage your debt and possibly get out of debt, you need to know where your money is going every day. If you are spending your money on nonsense that could be going to help pay off debt, make the change. If you see that you have a gym membership you haven’t used in years, cancel it. Some even go to the extreme of cutting off cable and just use a streaming app.

There are ways that you can help yourself get out of debt. It is just going to take planning and commitment to do so. I can promise one thing, you will be glad that you did.

Use but don’t abuse credit. Credit is a good thing. It is nothing to fear. Heck, if you can get cash back when using a credit card for a purchase use it. But, don’t let is sit there. Use your credit card and then pay that purchase off immediately. You have to have credit! So don’t hide from it. Become a smart credit card user and don’t let your balance continue to rapidly increase.

Take advantage of the credit card companies. Don’t become the consumer that is drowned in debt paying them an outrageous amount of interest like they want you to be.

What is the best way to consolidate your debt?

 

“This is a tough one, because most debt consolidation can actually hurt your credit. If you go through consumer counseling where they negotiate down, that actually will wreck your credit. It can be, in some cases, worse than a bankruptcy.

One of the best ways to consolidate your debt, if you have it, is to use your home equity. If you own a house and have home equity in it, you can do a cash out refinance and pay off your debt that way. Otherwise, the problem is if you’re credit cards are all maxed out that means your credit score is low. So, no one is going to give you a really good rate on a new piece of credit because you’re credit score is already wrecked. The best time to get credit is when you don’t need it. That’t what is tough for people.

There are some great zero interest credit cards out there you can use to combine a couple of balances and pay them off quicker. That is something I recommend people do. But, you have to have a pretty good credit score to get the zero interest card. So, if everything you have is maxed out, it is this big catch 22. The best course of action is to start paying those down. Making the payments, and paying the highest interest rate credit card off first so that you can save as much money on interest every month.”