Having debt can be very helpful, but there is always a cost for this sense of ease. More loans means more interest you have to pay!
Debt consolidation is when your credit card companies or other loan providers get together and make one large payment every month. This makes it easier to manage your money as one monthly payment instead of many.
By managing your money in this way, it also helps prevent people from having to go through the hassle of paying off several accounts all at once. It may even help save you money if done correctly.
However, just like with any form of budgeting or saving, there are still benefits and costs depending on what you do with your money. In some cases, debt can actually hurt your finances.
This article will discuss some pros and cons of debt consolidations.
Cons of debt consolidation
There are some situations where debt consolidation is not the best option for people. In these cases, you may want to consider paying off your debts in order to achieve personal growth.
It can be difficult to understand why someone would tell you this, but it is possible to reach a state of mind where you don’t care about money as much.
You will instead focus on what matters most to you, which is career development and self-growth. By investing in yourself, you give yourself a better chance at success and happiness.
There was a time when I didn’t even know how to balance a checkbook. Now I do, so I pay attention to my finances and stick to budgets. It has helped me develop skills that have allowed me to earn more money later on.
If you’re in such a place right now, then try talking to your creditors about credit counseling or other alternatives to loan modification. You deserve a second chance and there’s no reason you should feel like you’ve wasted your life because of unmanaged debt.
Will it work?
There are many ways to achieve debt consolidation, some more effective than others depending on your situation. Most of these strategies involve you borrowing less money by taking out loans or credit cards that cost lower interest rates or have zero percent introductory offers.
Some go one step further and combine all of your debts into a single loan with an online creditor that can monitor and manage your payments for you. This makes it easier to track everything and ensure you will never miss a payment!
With all this emphasis on keeping up regular repayments, most creditors offer rewards to borrowers who pay off their debt quickly. These reward programs include discounts in future purchases or even cash back. It is common to find such rewards in store gift cards or merchandise.
While getting rid of extra monthly bills is great, remember that spending less money means buying less too.
Potential Bad Reputation
As mentioned before, credit card debt can quickly pile up and add to your worries. Many people make the mistake of trying to tackle their debt with expensive loans or expensive services that offer loan repayment plans.
By adding these new fees to already high monthly payments, you are actually making it more difficult to pay off your debts!
Some companies will even go as far as charging outrageous interest rates which only end in hurting you further.
In fact, there is an organization called Credit Card Accountability Companies (www.creditcardpoint.com) that tracks this information for us all. They create an easy to use website where you can check to see if these types of reputations exist for your specific cards.
This way you can avoid giving those extra fees and charges your money until you know for sure they’re not worth it.
It is very common to read about debt consolidation in the media or from friends and family who have done it before. Most people talk about how great this company or that company helped them and what a wonderful person their loan officer is, but few give you information other than a ton of new loans with different terms.
It is easy for companies to advertise a low monthly payment while also including large interest rate hikes later. This can be confusing for individuals who are looking to pay off their debts as quickly as possible!
Furthermore, most do not tell you if your credit will suffer due to these changes. Some experts say that having more debt makes it easier to keep up payments, however, there are times when being overpaying on one account forces you to lower another. If your creditors recognize you have money coming in, they may grant you an extension or even waive your late fees.
This could cost you nothing extra, or it could hurt your credit score. What we recommend is talking to several lenders and seeing which ones agree to help you achieve your goal faster.
As mentioned before, one of the main reasons people consider debt consolidation is to save money by lowering your credit card balance. While this can be done through using only cash or borrowing more money, there are ways to do it that have legal protections.
Certain types of loans are designed to help you pay off your debts in order to avoid bankruptcy. These are usually referred to as “credit repair” or “debt management services” because they help you pay down your debt quickly so that you will not need to file for Chapter 7 protection.
There are several different companies that offer such services, but most use special software programs to determine the best way to reduce your overall payment while staying within your budget. It may even suggest negotiating lower interest rates or fees on certain accounts.
One of the most common reasons for credit card debt is people spending more money than they have!
If you find yourself in this situation, it’s important to realize that your credit can be damaged very quickly. Most major credit reporting agencies will count all of a borrower’s payments as late within a six month time frame.
Because of this, even small instances of delinquency may hurt your credit enough to get flagged as “late payment” or worse, “default.”
As soon as these agencies learn about the default, then everyone else will too, and it could negatively impact your employment opportunities, housing rentals, etc.
This is why it’s so crucial to pay off your debts before things spiral out of control. Once they do, it can easily become difficult (if not impossible) to stay ahead of creditors.
A lot of companies offer budget-focused services that try to help you tackle your financial issues by restructuring yours. These are often referred to as debt counseling or debt management programs.
Some of the products offered include monthly installments or weekly loan repayments that can be paid via daily income. Others will actually work with you to prove how you can afford to spend money, thus keeping you from having to make large purchases.
By paying extra each week towards what you owe, you can break free quite quickly without needing outside intervention. This is called debt consolidation.
Potential Tax Issues
There are two main reasons why most people with high credit card debt choose to instead pay off all of their cards in one go. One is because they feel that paying off each account separately could trigger a tax penalty or even an audit.
The other reason is due to potential tax issues. It is very common for people who spend lots of money shopping online to use a pretense by saying you’re buying for business when, really, you’re spending more than you should be outside of work hours.
In these cases, what happens is you run into the deadline for an annual purchase (say, a car) and just before the year ends you make an extra large expense change. For example, say you put down $5,000 as your budget for monthly expenses for December. You hit November and realize you need to save some money so you drop your budget down to $4,500 per month. But then at the end of the month you buy a house!
You can easily avoid this by doing a yearly cost basis. This means tracking how much it costs you to live every day and adding up everything over a twelve-month period to determine if you meet the threshold for the taxable income. Most people don’t since we’re talking about budgets here, but if you do then there’s a way to protect yourself from an audit.
There are several ways to do this.