Most Utahns know how to acquire debts, but only a few know how to get out of one. When credit card bills begin to pile up and become unbearable to pay, many people use debt consolidation as an easy way out.
In theory, this practice makes regular debts more manageable because they are all rolled into one loan, which can be paid in installments. The idea is to lower the monthly payment even if it means paying for more interest in the long run.
In reality, though, any debt consolidation lawyer in Salt Lake City admits that it does not always pay dividends. If the goal is to be debt-free, many people fail miserably. The reasons below shed light on how this strategy sometimes does not yield good results.
1. The Wrong Method Is Used
There are many approaches to debt consolidations, but debtors do not always use the one suitable for them. It is imperative to use a method that matches your spending psychology. Otherwise, this practice can feel like a punishment, making it less exciting or convenient.
Sometimes, lumping all of your debts into a single payment may not be advisable to you. To some people, the snowball method holds more promise when it comes to debt elimination. In this strategy, you list all of your debts by balance and pay the minimum on all of them except for the highest one.
To others, the avalanche method makes more sense. In this strategy, you list all of your debts by interest rate and pay the minimum on everything except for the debt that costs the most interest.
But if you really must decrease the total cost of all of your debts, you may need to seek credit counseling. An organization specializing in debt relief may be able to renegotiate your mortgages with your creditors on your behalf, potentially decreasing your liabilities without acquiring a new loan.
2. The New Debt Is Never Paid Off
Sometimes, a person applies for a loan to consolidate all debts without the determination and commitment to pay off the new mortgage. Debt consolidation can free up hundreds of dollars, but an unreasonable individual may consider the new budget space as a room to acquire new debt.
Since debt consolidation generally decreases the monthly payment, not the overall balance, many people dig themselves deeper holes.
3. The Credit Score Is Inadvertently Decreased
One of the most unwise things people do to “curb” their unhealthy spending habits is to close out old accounts. Cutting up most of your credit cards is wrong on many levels. It increases your debt-to-credit-utilization ratio since the only basis now is the limit of your remaining credit card(s). Also, it minimizes the payment records of yours credit bureaus can review, for the closed accounts are no longer a factor.
It can take a while before you can rebuild your credit. If lenders perceive you as less creditworthy, you have fewer chances of negotiating for a lower interest rate in case you take out a loan again in the future.
Debt consolidation is a contentious matter, and everyone has a different opinion about it. It is best to consult a professional to get expert advice before making any decision you may regret for a long time.
