One of the social mantras we seem to hear a lot of is the idea of using a loan consolidation to pay off high-interest credit card debt. While this can sometimes be a good thing, it's not a quick fix that works for everyone and, in most cases, is merely salve on the wound rather than true healing.
Debt Consolidation Loan Benefits
The benefits to paying off credit card debt with lower-interest loans are obvious: you get lower interest (which usually means lower overall payments), you make only one payment per month instead of several, and all of this often means the debt can be paid for more quickly. Loan consolidation can offer all of these things.
It can offer them.
Debt Consolidation Loan Pitfalls
That doesn't mean it always does and it definitely doesn't mean you're really out of debt. YOU HAVE JUST MOVED DEBT!!
Paying off credit card debt by getting another loan is merely transferring the debt, not paying it. That's an important thing to remember because that is more often than not the real pitfall with loan consolidation.
Many people have fallen into this trap. Chris Viale, who is the general manager of Cambridge Credit Corp (a non-profit credit counseling agency), says that 70% of Americans who take out a loan to consolidate debt end up with the same or more debt load within 2 years.
In other words, now that the credit cards are “clear” and the bills are coming in with $0.00 balance on them, card holders begin to see more money available and, rather than spend the extra cash they might have, now that their loans are lower-cost, to more quickly pay those loans, people are instead going deeper into debt.
This is an easy trap to fall into. There are hundreds of justifications people can make to themselves, even with the best of intentions.
Actually paying off credit card debt, rather than getting a new loan and thinking as if your credit cards are paid off, is an important step towards financial solvency. Shuffling debt around is only an interim step that doesn't meet the goal of actually paying the debt off. Putting your home at risk (through equity loans) or other means may not be your best option or in your best interest.
Often, debt consolidation can help make it easier to keep up with your bills and pay off your debt, but it still requires discipline and isn't a “quick fix” by any means. It's a bandage on the wound, but the debt wound still requires healing. That comes from you, not your credit.
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I feel vindicated! Thank you. For a long time one of my most popular post was why I don’t support debt consolidation. It came from personal experience and ignorance; I was one of those 70%!
We can’t learn to ride a bike by paying someone else to do it for us, what makes us think we can learn debt management without doing it ourself?
LeanLifeCoach´s last blog ..Finance & Marriage – To Share Or Not To Share?
I’m with the Coach on this one for sure. I juggled debt like a carnival sideshow and just got deeper and deeper in the quicksand. I have sworn off the use of credit and I budget a little extra each month towards the remaining debt. It is slowly but steadily disappearing and in two years I should be done with all of it. Debt consolidation is a smoke and mirrors approach that doesn’t actually remove the source of the problem, which is usually our own spending habits.
Tracy´s last blog ..Surviving Debt Recovery: Watch out for that Tree!