Is Debt Consolidation Necessary?

With near everyone complaining about credit card bills they can no longer pay and mortgages they never should have taken out in the first place, it was just a matter of time before the debt consolidation industry took hold of the public’s imagination. Most people finally seem to understand that, after 2005 congressional legislation, Chapter 7 bankruptcy no longer promises anything to ordinary consumers beyond increasingly dear attorney fees, and, if recent studies are true, our national obsession with unsecured debt continues unabated. An article in the Wall Street Journal announced that the average household now carries a dozen credit cards among their members with a total balance approaching eighteen thousand dollars. Honestly, if anything, it seems odd that Americans did not turn to the debt consolidation approach sooner. Once debts have reached a size and number that makes their speedy resolution untenable, it just makes good sense to examine whatever alternatives now exist. However, it’s one thing to take a look at debt consolidation and quite another to jump blindly into the first program sold by a glib professional promising the world. Debt consolidation may be a solution, but each of the various programs will contain its own share of dangers. More to the point, they certainly shan’t eliminate lifelong burdens without some degree of discipline on the part of the borrower.

Just because we as a people have finally recognized our problems with debt both secured and unsecured does not mean that we are actively striving to fundamentally eat away at the underlying concern. Debt consolidation is sort of a catch-all phrase for many different approaches toward managing financial burdens, and not all of these consolidation programs should be equally respected. Indeed, some of the shadier options could even be considered actively destructive to the borrowers’ household economics. In this essay, we would like to discuss some of the problems that debt consolidation presents for families. While the notion of consolidation has received a good deal more attention of late, the same cannot be said about the details surrounding the various techniques utilized. Also, we would like to introduce some of the ways that consolidation could be simply avoided through hard work and disciplined budgeting on the part of the borrowers. Remember, even though it’s far less damaging than bankruptcy, all forms of debt consolidation should still be viewed as last ditch efforts to repair mishaps or heal poor purchasing decisions from past years. The debts are not going to be eliminated after all, and it’s important that consumers remember that they are still liable for the sums even once they are consolidated. If debtors continue the same careless shopping sprees and knowingly spend more than they earn, than consolidation will have no effect and, once again, could even worsen the borrowers’ overall financial scenario.

One of the main principles you should take to heart when looking at the debt consolidation process should be this adage: the lower the payment, the longer you’re going to be stuck paying off your debt. The less that you pay every month following a successful debt consolidation, it should be understood, will only increase the amount of money that you will pay at the end of the loan after compound interest continues to expand the overall balance. It’s just common sense, really. Put off paying today what you could pay off tomorrow, and you will inevitably owe exponentially more. Most lenders, of course, will never illustrate that philosophy. Consolidation companies’ income largely comes from just this sort of accumulation of interest payments, and they generally try to appeal to borrowers’ (oft delusional) beliefs that they will immediately quit the spending reflexes of a lifetime and devote themselves to patterns of saving that would allow them to repay their loan that much earlier by paying over the minimums. Don’t be fooled by easy flattery and pie in the sky speeches about a sudden change of habits. Most every consolidation professional will attempt to insist that, all of a sudden, you will pay more than the minimum obligation. Know yourself and your buying habits. If you have not been able to restrain spending in the past, there’s no reason to believe that a sense of responsibility will suddenly come your way absent any effort, and, depending on the program, the sudden availability of open credit accounts could just make things worse.

At the same time, though we would certainly advise borrowers to do everything they could to pay down their debts regardless of what the minimum payments are fixed at, one also has to make sure that they do not begin a similarly obsessive strategy of earmarking every dollar earned toward repaying past debts. Much as you would reasonably hope to devote all available funds toward debt elimination, the smart borrower yet maintains a cash reserve to guard against every bad patch. For those loans attached to collateral (equity loans, particularly), it should be of the greatest importance to ensure breathing room. Real estate values have become so tenuous of late that no home owner who cares about their investment (or, more to the point, their family) should dare risk their precious equity for a quick fix, and debt consolidation in the wrong scenario could actually back fire against the consumer. Considering that the financial obligations likely came about through reckless spending, consumers must be very careful not to over indulge their new desire for a clean slate. Loan officers, in particular, are at fault for convincing their clients about the future health of an uncertain property market or evading the depressing but pertinent details about foreclosure and the danger of equity loan consolidation. However the mortgage industry attempts to weather the storm partially caused by predatory lenders acting in their own best interests, the effects of the loans that they pushed upon unwary borrowers continue to bother the national economy.

One should never entirely trust the lenders, after all. Credit card companies and mortgage loan companies depend upon the borrowers’ willingness to sustain payments and extend them for years if not decades. In fact, lenders list each client’s balance as a bankable asset to be sold or traded to other lenders (or, ironically, used as collateral for their own loans). Whatever the lenders’ literature or representatives may say about helping borrowers minimize their debt load with an eye toward eventual debt elimination, their business model explicitly demands a continual revolving debt cycle that forces debtors into a life of servitude, ever subsidizing their financial burdens without actually getting rid of them. We are not necessarily suggesting that you close all cards after consolidation – though, with some programs, that will be necessary – because of the effect that would have towards your credit rating. The ever powerful FICO score likes to see some accounts open to demonstrate that you still maintain some credit viability, and, with all accounts closed, you would be starting again from scratch with no current credit history to draw upon. Ideally, you would maintain one or two of the oldest accounts or the accounts with the largest available balances (interest rates should also be part of this discussion), but it is of sacrosanct importance that these accounts not be used regardless of how much you may wish to resume purchasing. For convenience’s sake, it might be useful to take out a bank card for ordinary spending but only one that has debit purposes without overdraft potential.

All the same, much as plastic may now seem an undeniable essential of the modern consumer experience, there are reasons to still avoid utilizing any cards at all. Studies have shown that household economics are utterly ruined through the casual use of cards credit or debit when attempting to maintain some sort of workable budget. Once families no longer have to count up the prices of the items that they are purchasing, it seems all common sense goes entirely out the window. For this reason, we recommend that debtors – even before they have begun the process of consolidation – attempt to refrain from using cards even during their normal shopping for the household. For that matter, they should try to not even bring an ATM card upon their person and make do with whatever seems reasonable when leaving their house. If you only have twenty dollars to spend at the supermarket, you will be much more inclined to question the necessity of various purchases and also make more of an attempt to comparison shop by trying lower cost brands and such. One should be careful not to ignore the bulk discounts for large families, but, by and large, this sort of tactic goes a very long way in conserving money to bolster savings that can better be used paying down the debts that you already have.