Do Debt Consolidations Really Work?

Debt consolidation is a process of taking many debts and combining them into a single debt. Usually, the debt being consolidated is unsecured, high-interest credit card debt. The advantages of consolidating debt are psychological and financial relief.

Psychological Relief

When people get over their heads in debt, it can cause psychological distress. Some of the tell-tale signs include avoiding looking at your bills and receiving phone calls about overdue accounts. People who have too much debt may be using advances from one credit card to pay off another. The psychological toll this takes should not be underestimated, and it can impede you from taking necessary steps to reduce debt.

Financial Relief

Financially, the problem is that avoiding or ignoring the issue won't reduce the debt burden. If, however, one consolidates debt, then the question of "How do I pay the next bill?" falls away, as the consolidation loan is typically a single, affordable monthly payment.

Lower Interest Rates

Consolidation loans usually offer a lower interest rate than the rate the credit card company is charging you. A lower interest rate means that the monthly payment may be lower, or the time to pay off all of your debt will be shorter. At the very least, the scramble to pay the next bill will no longer be a part of your daily life, and the phone calls from the collectors should stop.

The Pitfall of Debt Consolidation

Debt consolidation can save you money and reduce the stress in your life, but it is critical to understand how you got to the point of needing a consolidation loan in the first place. Most people get there because they spend too much, as compared to their income. In order for a debt consolidation loan to work, your spending habits have to change. Otherwise, in very short order, you will find that in addition to a consolidation loan, you're back to where you started with credit cards bills. One of the best things to do once a consolidation loan is in place is to close all credit card accounts, except perhaps one, and even then significantly lower the credit limit on that card.

Steps to Take

If you have a good relationship with your bank or credit union, you might approach it for a consolidation loan. In some cases it can be worthwhile to refinance your mortgage and consolidate your debt into your mortgage. There are not-for-profit organizations that offer advice and consolidation loans. Recognizing a problem exists is key, and then reaching out for help will lead to financial and psychological relief.