More Than Finances

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Is Debt Consolidation Right for You?

Working Overtime - A Blessing Or A Curse3 reasons to refinance before you are caught in the debt cycle

A vast number of Americans live in a the debt cycle of spending more money than they have coming in while financing their existing debt. There are many reasons that people fall into the debt trap, yet only a precious few ways to break out of it.

The current sluggish economy has made it difficult to break out of the debt cycle. Cost of living continues to rise at historic rates, but income has remained relatively stagnant for the last few years.

What is the debt cycle?

Although not all debt is bad, having debts that you are unable to pay or debts that take away from your standard of living is not a good thing. Many of us rack up a lot of debt going through college, buying a house or after a severe illness or accident.

Paying off that debt can lead to an unsustainable lifestyle as we are forced to choose between paying our living expenses or paying off our debt. Since the immediate effects of not paying rent or a mortgage, skipping car payments or not buying groceries are apparent, the bills that most often don’t get paid are the ones that have no immediate effect other than on our credit rating.

The importance of credit

Generally, concern for our credit rating is well down on the list of needs. Food, shelter, work all come above it, but the health of our credit rating can have major effect on our standard of living, especially as we get older.

In addition to making it more difficult to buy large ticket items like a home or vehicle, a poor credit rating can cause unexpected problems when trying to get a job, getting auto or home insurance or renting an apartment or a house. Keeping your credit rating in decent shape should be a top priority.

Fixing your credit once it is damaged

If your credit rating isn’t in decent shape, there are steps you can take to repair it. However, the first thing you must do is to correct the underlying problems. Paying off your bills only to immediately begin accumulating them again only reinforces the debt cycle. To break free, you must fix the behavior that causes the problem in the first place.

Identify your financial problems, create a budget and reduce your spending, especially your use of credit cards that cause more debt. If that doesn’t solve the problem then there are things you can do to repair your credit rating.

  • Get copies and review your credit reports. In 2013 the Federal Trade Commission found that 25 percent of credit reports had errors in them. These can range from incorrect billing to outdated information. Fixing your credit might be as simple as discovering and disputing an error.
  • Raise your credit limit. Although this might seem counterintuitive, raising your credit limit on your credit cards but not utilizing them can improve your credit utilization ratio. This ratio is the percentage of credit you use compared to the credit you have. The lower the percentage, the better your credit is. Raising your limit while paying off your credit cards and not using them will improve the score.
  • Get a debt consolidation loan. Refinancing existing debt and consolidating payments can have multiple benefits. Your payments are lowered, there is less of a chance for a mistake to damage your credit and you only make one payment per month as opposed to multiple. Merging debts is not for everyone, but to see if debt consolidation is right for you, you should speak to a professional who is familiar with it.

Fixing your credit can be a lengthy process, so don’t expect overnight improvements in your rating. Patience and persistence will carry you through until your credit score is decent again.

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