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Credit Card Debt Consolidation

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Dan Steadman

Financial Advisor, DCL

Credit Card Debt Consolidation

Credit card debts, while not requiring any collateral, affect the financial wellbeing of many Americans today. Since lending institutions have relaxed their policies, a lot have been taking advantage of easy access to money.

This, coupled with relatively low interest rates compared to the 2008 financial crisis, has resulted to a continuous increase in credit card debts. In fact, it is expected to continue on this trend for the next years.

What this means that most Americans, no matter how well-off they seem to be, have debts they are yet to settle.

Why do Americans have so much credit card debt?

Acknowledging that there are a lot of things beyond our control, credit card debts are not only a result of mismanagement. Here, we list the most common ways a person falls into debt and what you can do to avoid or address them.

A Lack of Savings

Despite being aware of the unpredictability of life, statistics show that 69 percent of Americans have a savings account balance of less than $1,000. What is more alarming is that 34% of those do not have any savings at all. This exposes them to sudden changes such as loss of a job and other emergencies.

Some of these people wake up every day knowing they are in great shape financially, then broke the next day. Unable to augment their income as quickly as they came across an emergency, they have to resort to credit cards.

That is only the beginning for them. Even after dealing with whatever crisis that came, a big debt that has already accumulated interests still exists. For tragedies not to hit you too hard, save at least three months’ worth of your budget.

Poor Money Management Skills

Money as a limited resource must be managed. Unfortunately, a lot of people lack this skill. Living in a very consumerist environment, they are easily enticed by “hot deals” and other forms of marketing. We are pushed to think that we can afford things we really cannot, and when the compulsion becomes too great, we put it on the credit card “just this once.”

A month later, another deal you cannot miss comes, and so on until you are stuck with a large debt. No matter how much you earn, you can still fall into credit card debt. The only requirement is you spend more than you make.

Cost of Living Increases at a Faster Rate than Income

The growth of income has failed to catch up with the cost of living, leaving most Americans on a tighter budget. If you are living paycheck to paycheck, even the slightest increase in the cost of living will affect you.

This is especially true for growing families. If you’re still earning the same amount as when you were single and you now have a wife and two children, it would obviously be difficult to pay all the necessities and bills while giving your family a semblance of normal life. Luxuries are out of the question. The household income would be devoted to food, clothing, paying off mortgages and a car.

Sometimes, even cost cutting and a sideline are not enough to make ends meet. Depending on credit cards makes sense, in this case.

The problems are compounded when unexpected expenses arrive. When a family member gets sick and there’s no health insurance, or only a part of it is covered, the head of the family will be forced to borrow money in the form of a loan or take out a cash advance from his or her credit card. When the car breaks down and you don’t have money for major repairs or for buying a new one, the most logical solution would be to borrow money and pay it off either immediately after you get your next paycheck or on an instalment basis. Either way, this will upset the family budget, and may cause you to scrimp on the food budget or miss a couple of payments on your car or home.

Loss of a Job

Unless you own Apple or Windows, the biggest source of your income is probably your job. Especially if you are the sole provider of your family, losing it can cripple you financially.

Having no other earner to contribute in the household budget, paying bills even for your most basic needs like food and shelter can be hard. Some companies offer assistance such as severance pay, but that cannot permanently sustain the whole family.

If you are serving a saturated market, new jobs will be harder to come by. Therefore, to deal with this great a financial impact in your life, credit cards may be your only way out.

Sickness or Injury

Suffering from a fatal disease or a tragic accident doe not only shatter your bones or one of your organs, but their financial health as well.

Even with insurance, medical bills, not to mention the medicine bills, can easily pile up especially when you need to stay in the hospital until you recuperate.

To pay these, you may be left with no choice but to put it all in your credit cards. Given their high interest rates, the total amount you owe will continue to increase even when you are already well.

Depending on how severe your condition is, it is possible that you will not be able to go to work for an inordinate time.

Divorce

Divorce plays a large role in accumulated debts because it takes both parties from a relatively stable living condition to a totally unpredictable one. To begin with, lawyers are paid by the hour. The longer they agree on a settlement, the higher the fees get.

Aside from that, child support payments as well as new household costs may be too big for one to handle with the paycheck alone. In this situation, there is no choice but to turn to credit cards.

Natural Calamities

While there is home insurance against theft and fires, there’s no complete insurance coverage for forces of nature, or what they call “Acts of God”. While it doesn’t happen every day, when they do, these natural calamities can damage homes and property can leave people’s lives in shambles. Hurricanes, earthquakes, and other disasters cannot be predicted no matter how advanced science becomes. The recent spate of hurricanes and tornadoes affecting the United States and nearby areas have devastated homes and affected businesses. When these things happen, people who don’t have a lot of savings are forced to borrow money from the government or people they know in order to get back on their feet. Houses need to be repaired, new appliances and furniture need to be bought, while others choose to relocate to a whole new area and build their lives from scratch.

While these situations are considered out of the ordinary, they do happen and leave a deep impact in the lives of people. Natural calamities are things we don’t have any control of, but the more common reasons why people go into debt, are within their control.

Are You in too Deep?

The longer you keep a credit card debt, or a payday loan for that matter, the larger the chunk it takes out of your paycheck. Once it affects your spending on basic needs, you might want to start considering your options. If you don’t, you could find yourself having less and less money to spend on bills and necessities. You could also be saddled with interest and this could delay the repayment of your loan even further.

Some of the other signs to look out for when identifying your financial health include the following:

  1. You have a low credit score.
  2. Your credit cards are near their limits.
  3. You are only paying the minimum amount required per month.
  4. You cannot save for an emergency fund.
  5. The interest rates are considerably higher compared to when you first acquired a credit card

There are consequences for failing to meet your responsibilities to the credit card company. By considering credit card consolidation, you can transfer this debt to another loan with lower interest rate and longer payment plans.

Considering Credit Card Consolidation

Credit card consolidation plans can be secured or unsecured, and what you will need depends on how much you owe as well as your credit rating.

For many, this is the smart thing to do as it takes the hassle out of credit card payments while also preventing you from owing even more through accumulated interests.

There are several advantages to consolidating your credit card debts. For one, it means having to pay only one interest rate and one bank. You don’t have to worry about making multiple payments and meeting each and every due date on time. The bank or credit consolidation company will merge all of the amounts you owe from various credit card companies and pay them off. You will end up owing only them. Once you choose to have your debt consolidated, you must be very honest about how much you can afford to pay every month or every payday. The loan consolidation company will help you pay off these debts so you can start fresh.

A Refinance of Your Current Mortgage with Cash Out

Refinancing your current mortgage offers a lot of convenience for people struggling to pay their credit card debts. For one, the interest rate is lower so you can actually save money from refinance.

Along with the life of the term is longer for mortgages, you may end up paying virtually the same amount, depending on how big your cash out is. This is one of its best selling point as it offers something (credit card debts being wiped out) for almost nothing.

While a refinance addresses cash flow, one must not forget that closing costs will be incurred with this option. Amounting to a few thousand dollars, it can be paid upfront or be added to the balance of the loan.

Aside from that, it is also very risky, especially for people with unstable income. Credit card debts are unsecured, meaning creditors will not seize your assets for not paying. However, with refinancing your mortgage, your collateral is on the line.

Failing to practice restriction in unnecessary spending and to complete the payments means losing your home.

Home Equity Line of Credit (HELOC)

Having very valuable assets in your estate may prove useful when faced with high amounts of debt. Unlike your traditional mortgage, home equity line of credit does not give you an amount close to value of your house. It is much smaller.

What will be put on your credit depends on your mortgage. Most of the time, the value of your home is higher due to inflation. The difference is what the creditors award you.

Finance institutions are usually very relaxed on where you can use it. However, if you are already in debt, you should use it to settle the amount you owe to credit card companies.

Personal Loans

Good credit is a measure of how trustworthy you are when it comes to paying your debts. This can almost guarantee you a personal loan. However, because there is no required collateral for you to obtain it, the amount that will be granted to you is relatively smaller.

This is a great option if you have been a little short on cash for only a few months, this may be for you. Still, you have to make sure you will have the financial resources for this loan.

Compared to secured debts like mortgage, the interest rate here is relatively higher. Moreover, the life of the loan is much shorter. Thus, if you need a large amount of money, this is not for you.

If you wait too long to address your credit card debt, you may be left with limited options when you finally wake up to reality. The worst case, you will have no choice but to file for bankruptcy.

One of the ways to solution this is by contacting your creditor to renegotiate your payment terms. However, as true as it is most of the time, avoid debt unless completely necessary. Manage your budget, and you may find you may not actually need a credit card at all.

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