First of all, if you’ve arrived at the stage where you’re even considering a debt consolidation program, congratulations. Just by doing that, you’re way ahead of many of the people in your situation. And if you are ready to travel further down this path, you’ll want your debt consolidation journey to be as trouble-free as possible. In order to do that, you’ll have to know what to avoid – and it can go very wrong if you’re not careful. What follows are the most common roadblocks to debt consolidation success. Heed them well!
- Trying debt consolidation without proper counseling
Now that you’re about to commit to a debt consolidation loan, have you talked to a credit counselor? Why would you want to do that? Because a counselor will guide you through the process of reviewing your credit and determining if consolidation would be a viable option for you. (Transformance, Inc. — formerly Consumer Credit Counseling – is one resource available. You can reach them at 512-447-0711.)
A credit counselor can also ensure you have created a workable budget for yourself and can make a plan for you that entail paying cash on all purchases going forward. Remember that your debt consolidation journey has now brought you into Cash World. Your days of charging are over! Does that sound a little too basic for you? Maybe it is, but it works.
- Not treating debt consolidation as the first step to debt elimination
Getting your debt consolidated is a very important first step, but it is only just that: the first step. Now the hard work begins: Eliminating the debt. That is the vital second step. Envision yourself as a debt-free person and work toward making that vision a reality.
- Only taking half measures on your debt consolidation
Since the primary goal of all this is to eliminate debt, you have to ask yourself if are you doing everything you can to make that happen. Have you been able to separate necessary spending from desired spending? Are you committed to the cash-only lifestyle?
Have you considered working overtime or getting a part-time job to help accelerate eliminating the debt? If the thought of working two jobs sounds daunting, you can promise yourself that you will only do it until certain debt-reduction goals are reached. You can dedicate all of the money from the second job or the overtime to your debt reduction program. Remember: You need not consign yourself to working two jobs or working overtime for the rest of your life; you only need to do it for a specific amount of time.
- Picking up where you left off prior to debt consolidation
This unfortunate situation comes about when you become lulled into a false sense of security created by getting your debt consolidation loan. Because your monthly payment has been reduced and a variety of creditors have been paid off, it’s only natural to feel a lessening of the pressure inherent in those unpleasant effects of being in debt. It’s certainly a positive step that the high payments are gone, but don’t let their absence fool you into thinking that everything is perfect and you can go back to spending money the way you used to. Remember that you are still in debt – it just looks different now.
A debt consolidation loan is not like the ‘Get Out of Jail Free’ card in the game of Monopoly. Yes, it buys you time and relieves pressure, but it does not cure your problem all by itself. By not changing your buying habits and not going to an all-cash spending program, you will put yourself in a position where you not only have your debt consolidation loan, but all the new credit card debt you accumulate after the fact as well. That is why paying cash for items is the key to success in eliminating all debt!
- Not having realistic debt consolidation goals
While your debt may have accumulated in a short period of time, it is most probably going to take much longer to pay off. The knowledge that your situation will not be completely resolved overnight can be very frustrating to process, but it is essential that you know what the length of the resolution period looks like. Your challenge is to stay focused on the program you have created for yourself. Understand that your debt is going to go away in small pieces – but it will go away!
- Not understanding the possible extra cost of a debt consolidation loan
It is important to know that if you do not shop for a good rate and an aggressive term, a debt consolidation loan can sometimes actually cost you more money in the long run. This is a function of the trade-off you are making. By getting a lower monthly payment, you are extending your payment period, which means you’ll be paying more interest over the life of the loan. You can beat this trade-off, though, by paying down the debt consolidation loan as quickly as possible — ideally long before the full term of the loan. By doing that, you can save a considerable amount in interest.
- Not understanding that some creditors will look at debt consolidation unfavorably
While it is much more of a black mark on your credit report to declare bankruptcy, taking out a debt consolidation loan may alert other creditors you may be struggling or even adding more debt. Ironically, these seemingly negative side effects may actually be a positive! How? Well, if you are bent on breaking the cardinal cash-only rule by trying to open new credit accounts, potential creditors may be more hesitant to approve you when they find out you have recently taken on a debt consolidation loan. They may decline your request and you will be forced to stick to your cash-only lifestyle. In the end, you win!
About the Author
Terry McCoy has spent over 25 years in the credit union industry all focused in the lending area in both New York State and Texas. He has spent over 16 year at his current credit union, Amplify Credit Union, in dual roles as a Sr. Training Specialist and a Sr. Credit Analyst. Outside of the credit union industry, he has spent the last 4 years as a volunteer Credit Counselor, Financial Counselor and a facilitator of Money Management classes for an Austin affordable housing non-profit.