Bad Credit Debt Consolidation: Royal Road to Financial Freedom or Just Symptoms Cure?

Do you think you are a typical American citizen?, If the answer is yes, then your household probably also has a debt of about $14,500 and you annually spend more than you earn. Not an American – ok, don’t worry! The situation in Canada, the UK or other developed countries is not much different. But how to get out of debt if you are not able to pay your monthly obligations? It seems difficult to find a solution, but the earlier you start reducing or consolidating your debt, the better. With time it becomes even more difficult. Many advisors recommend starting with debt consolidation in order to recover control over personal money management. Debt Consolidation means in general, taking out one loan to pay off several others. This is often done to secure a lower and fixed interest rate and has the convenience that you only need to service one loan instead of many. If you manage to get a considerably cheaper short-term bank loan or you can achieve a mortgage refinancing or a home equity loan, you save a lot of money and will be able to pay back your debt faster or even at once. As a first step you should consolidate all of your short-term debt into one loan in order to reduce your monthly payments. Important: Start with your credit card debt as you usually pay a much larger interest rate than even with an unsecured loan from a bank. nn Risks and Problems of Debt Consolidation You should know that Debt Consolidation also has its drawbacks. First of all it will be difficult to obtain a cheap loan if you have a poor credit score or even worse if you've declared bankruptcy. These days, more and more people are suffering difficulties in servicing all their debt repayments, with the consequence that they are getting negative credit report entries and thus decreasing their credit worthiness. If you don’t get a loan due to your poor credit score you are in trouble and it is recommendable to request help from a professional financial consultant. There are several options for credit repair programs and bad credit debt consolidation [1], which help to improve your credit score and enable escaping from this catch-22. But in recent years, reports in the media have raised concerns about the use of consolidation loans [2,3]. Many people are tempted to consolidate unsecured debt into secured debt, usually secured against there home. What consumers need to know is that Bad Credit Debt Consolidation often only treats the symptoms of debt and does not address the root problem. “The problem is that people see their monthly repayments are lower and then go out and spend the difference. They don't understand the long-term picture or the trouble they've got themselves into”, says Mr. Treharne, head of personal insolvency at the financial services group KPMG. Good debt management is 80% made in our heads and only 20% based on financial technical knowledge. Only if we manage to change our behavior, a Bad Credit Debt Consolidation will be a sustainable solution. Everybody knows that this is not an easy task, but there are proven systems for improving Debt Management and achieving our financial freedom. n nThe first step is as simple as well as difficult: nn Stop Spending – stick to your budget! This is common sense and the traditional Grandma’s way of handling money, but it always works. Statistics show that more and more people forgot this golden rule of money management and it pulls them deeper and deeper into the dept swamp. There are hundreds of publications providing systems and money management plans. One of the most known approaches is the “Debt Snowball Plan” from Dave Ramsey [4]. Ramsey’s money Debt Snowball System as already helped hundreds of thousands of people change their lives through simple determination and following a plan that works: Stop everything except minimum payments and focus on paying off the smallest debt first. The advantage of this system is that paying off the smallest debt gives you quick feedback, and you are more likely to stay with the plan and keep stepping up to the next larger bill. Once you have a real debt management plan in place, it’s only a matter of time. Important for the success of the system: avoid using credit cards, as you need to control your expenses. Only following these “simple” rules, Debt Consolidation will be sustainable and not just a symptoms cure.n n Literature n1. Bad Credit Debt Consolidation - Credit Optimization Strategies n2. Wikipedia, The free Encyclopedia n3. Robert Watts and Roya Nikkhah, More people have loans that risk homes, Sunday Telegraph, 7/7/2007n4. Dave Ramsey, The Total Money Makeover n