Do you feel like you’re getting behind financially? Are the bills piling up and you’re low on cash? If you’re finding yourself in this situation, you might be wondering when debt consolidation is the answer. Before we answer this question though, it might be easier to discuss when one should not consolidate debt.
When is Debt Consolidation NOT the Answer?
- If you currently have debt, but have enough income to make the minimum payments, it’s not time to consolidate.
- If you’ve consolidated before, and now you’re in the same boat again (of not being able to pay your bills), it’s not time to consolidate.
- If you’re out of work and do not have a sufficient income, consolidating will not help you. Your time would be better spent checking those “Wanted” ads.
- If your friends claim that they’re saving money by consolidating, don’t believe them and don’t consolidate your debt for this purpose. The consolidation company needs to get paid – they’re not consolidating your debt for free!
How to Avoid Debt Consolidation
If one of the bullet points above describes your situation, then you really don’t need to consolidate. What might work best for you is the almighty debt snowball!
If you are unfamiliar with this term, just think of that initial small snowball (this would be a garage sale, or some way to make some extra cash) at the top of the hill. Then with a small nudge (that first extra payment on one of your cards), that small snowball will begin rolling down the hill, getting bigger and bigger, faster and faster (this signifies the amount of money you’ll be able to put toward each debt payment as you pay off one loan, then another, and another). Soon, that ball gets huge and you’ll be paying more money toward your debt than you pay in rent! That is the power of the debt snowball. Once one debt is paid off, that payment gets applied to the next one, and your payment power keeps building and building!
You might be wondering how you can get your snowball rolling. This could be a garage sale (as I mentioned above), but it could really be anything. Let’s say your friend wants to get his car detailed. Why not offer to do it for him and charge him a little less than the pros? This move could put $100 toward that first credit card bill. It’s as easy as that!
Once you get the snowball rolling, it can really take off in a hurry! Before you know it, you’ll have a few credit card bills paid off and then there’s no stopping you!
When Debt Consolidation Might Be Appropriate
When a person gets their first loan, life seems great! The payments are low, the cash flow is high, and life couldn’t be better! It seems like such a good idea, in fact, that they purchase a few other items on credit, and they get a couple of credit cards. All of the sudden, it seems the same income isn’t going quite as far as it used to.
At this moment, you are spread to thin. More accurately, you have nothing to spread! There’s just not enough money to pay the bills anymore.
If you’re in this situation, make sure to talk with your creditors and let them know what you’re facing. If they understand that you absolutely can’t pay the loan back, they might work with you directly. They might take off some of your interest payment, or they might lower the rate of interest that you’re currently paying.
If your creditors are willing to work with you, then there’s no need to consolidate. You’ve effectively done that yourself. But, if this method does not work and your bills keep stacking up, then it might be time to call up a debt consolidation company.
Don’t expect to pay less overall than what you owe, but this process might make your payments manageable. Just remember that no one should ever consolidate their debt twice. Debt consolidation is a method to get out of debt, not to accumulate more stuff!
Have you ever thought about debt consolidation? Have you actually gone through the process?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.