As per recent reports, consumers in the US are piling up credit card debt like its 2008! Despite Americans racking up debt on their credit cards, fewer are seeking help of credit counseling agencies or debt consolidation firms to restore a firm grip on their finances. Poverty in the US has increased and unemployment is still stubbornly hovering around 9%, showing chances of entering into a double-digit figure. Meanwhile the consumers accumulated an additional debt amounting to $19.5 billion in the second quarter of 2011, a figure that is up by 66% from the same quarter in 2010 and 70% from 2008.
A spokeswoman of the National Foundation for Credit Counseling (NFCC) has recently opined that she can feel that the consumers need them but are not turning up for some strange reason. The number of debtors who resorted to a professional credit counselor to eliminate debts has declined by 20% since 2010 and this sharp fall is continuing in 2011. She says that the most probable reason for this decline is that the consumers are becoming wary of trying and are giving up. As per the AICCA (Association of Independent Credit Counseling Agencies), the number of consumers signing up with a debt consolidation or a debt management plan has even dropped by 40% since 2010.
Consolidation loans may deepen fiscal woes – A personal finance illusion
With mortgage rates at their record lows post credit downgrade, consolidating credit card debt by refinancing through a loan may substantially trim down the monthly payments of the debtor. Despite the seemingly attractive benefits of consolidating through a loan, there are some financial experts who vote against it as there is a personal finance illusion associated with taking out such a loan.
What is the actual illusion that pushes debtors deeper into the trap?
For those individuals who are in a bind due to a prolonged illness, a job loss, a divorce or some other major experience, a debt consolidation loan is certainly a good way of digging out of the debt hole but experts have researched that most people use it as a way to delay the inevitable. It makes sense when you take out a consolidation loan and also harbor a solid plan to get out of debt, but not when you breathe a sigh of relief and get back to the same situation in life. Habits are hard to break! Just when you think you’ll firmly control, you backslide again. Such may be the case with your debt addiction. If you can’t change your personal finance habits, and yet you take out a debt consolidation loan, then you’re just postponing the day you’ll go bankrupt!
Betting your house for combining credit card payments – Is it worth taking risk?
For most people their home is their largest asset. The most dangerous form of debt consolidation loan that the house-rich and cash-poor debtors take out is the home equity loan. Though it may sound seemingly tempting due to the tax breaks and the extended repayment period, yet this is an extraordinary risk due to the increased potential for a foreclosure. Therefore next time you’re tantalized by ads saying debt consolidation to be a simple solution to a serious situation, beware! Ask yourself the following 3 questions before rolling your unsecured debts into a home-equity loan.
- Why do you have this debt? If you’ve incurred debt as you spend more than what you can afford, then rolling your payments into a secured debt consolidation loan won’t help much and will likely become detrimental in the long run.
- What are the costs associated with consolidating debt? Remember that all those additional costs in the form of loan origination fees, underwriting fees and closing costs may add up to hundreds of dollar more than a regular refinance through an unsecured debt consolidation loan. If you’re paying a huge amount for closing costs, this will offset any kind of interest savings that you think you’re having.
- Isn’t there a more effective way than a secured consolidation loan? Consider whether or not taking out a regular consolidation loan or transferring your balance to a low interest card can help you save your dollars in the long run. If your credit score is pretty good, balance transfer might be a prudent way of condensing your high interest payments into affordable ones.
Break your bad personal finance habits – It’s time to act
As colleges, universities, business organizations and consumers struggle with their shrinking budgets, here’s the takeaway for all those debtors who think that debt consolidation is the ultimate panacea to their financial woes. This is just the beginning of your effort to get rid of debt, not the end! Whether or not debt consolidation will be a smart move to tackle your spiraling debts will depend on whether you take the following money management steps.
- Deposit your cards in a safe box: To break the bad fiscal habit of charging through whipping your plastics, don’t buy anything for which you can’t pay upfront for at least 8 months. Don’t close your accounts but do restrict the usage of them.
- Arrange a comprehensive cash-flow analysis: Where are your pennies going and how much are you paying towards your credit card repayment? Estimate your average monthly expenditure in all the areas. Figure out ways to cut back your expenses and to stick to your plan.
- Contribute money to your retirement funds: Start your workplace retirement fund and an emergency fund and keep on feeding it lest it vanishes. Save for your post-retired age so that debts don’t mar your golden years.
- Set a goal to repay your home loan: Don’t pay off your mortgages early as experts say that this may not be a wise option. After taxes of close to 4%, a fixed rate 30 year mortgage becomes an investment. A mortgage is an inflation hedge and you must use it accordingly.
- Hire a financial planner: They say that a financial crisis gives you a good opportunity to look at your big picture. Hire a financial planner who can offer you valuable advice regarding effective personal finance management and don’t shy away. Sound fiscal guidance will pay for itself.
With the stock market on a march to nowhere, the homeowners are increasingly looking at their homes as a viable source of quick cash. Tapping the equity in your home in such a white hot market to get quick access to cash isn’t the slam dunk decision that it seems at the first blush. Whether you take out a secured debt consolidation loan or decide to chip off in the old-fashioned way, have a solid plan in place. Though it may take your sweat to cut back your lifestyle and change your spending behavior, stick to your plan thinking about the brave reward for achieving all your goals.