Struggling with debt is no fun at all. Chances are, if you have been trying to pay down balances owed for a while, you feel exhausted and overwhelmed.
Perhaps, while fired up, you have even considered signing up for a debt consolidation service. Debt consolidation, while certainly a viable option that’s helped many people out of debt, shouldn’t be taken lightly. You will want to carefully weigh the benefits and drawbacks of each option and decide with a level head if it’s right for your situation.
Here are five critical questions to ask yourself before making a decision on whether or not to consolidate your debt.
- Could my debts be paid off if I change my spending habits?
Now is the best time to be really honest with yourself. If you were able to change some of your spending habits, would you be able to get out of debt on your own? This path isn’t an overnight solution, of course, but it could help you avoid the sometimes complicated details of consolidating debt.
If fact, debt consolidation on its own is not a solution for paying off debt. Rather, it’s a strategy designed to give you a bit more space to pay down bills that you owe. What this means is you still assume ownership of the debt and still have to pay; therefore, if you’re able to discipline spending habits enough to pay off debts without the help of a third-party, you should consider that as a first option.
- Do I actually understand what credit card consolidation is?
Credit card (or debt) consolidation is easy enough to understand on paper – once you’re signed up with a consolidation service, all of your payments are combined into a single payment that gets paid off over time. The best case scenario for consolidation is that your single payment is significantly lower than the payments you were making before and therefore can accrue less interest over time.
But with the benefits, comes a few drawbacks. For one, your credit score will likely be heavily affected during the period it takes to pay off the loans (likely three to five years), which could take a while to rebound once your debts are paid off. This is not to say you should avoid debt consolidation at all costs, but rather, just another reminder to consider and weighs your options before signing up.
- Can all debts be consolidated?
It’s a common misconception that all debts can be consolidated when in fact, only some qualify for consolidation. The most common type of debt people seek to consolidate are credit card debts with high interest rates, as well as some forms of medical debt and utility bills.
A good way to decipher if a debt can be consolidated is whether or not it’s considered a secured or unsecured debt. Unsecured debts may be consolidated, while most forms of secure debt may not. Unsecured debts include: credit card debt, student loans, payday loans, medical bills, court-ordered child support, and more. Secured debts are generally tied to an asset and include items such as mortgages and auto loans.
- Is it possible to pay off my debt on my own?
When asking yourself this last question, it’s important to not only consider if it’s possible, but also if it’s probable. Given the right circumstances and support, can you trust yourself to make considerable payments in order to finally pay down your debts, or are you looking for a quick solution to band-aid the situation? While debt consolidation can provide immense help for those struggling with debt, it’s a huge decision that should be thoughtfully considered before making a decision.
Tally up all the sources that contribute to your monthly income and subtract all monthly expenses to get a baseline number of the funds you’ll have to put towards debt payments. Expenses might include: utility bills, groceries, gas, rent, and similar things. After identifying how much you’ll be able to dedicate to making monthly on-time payments, decide if you’ll be able to realistically stick with a self-guided repayment plan. If you think it’s feasible, great, if not, be honest with yourself and reach out for the support you need.
If you have made your way through this list of questions and still feel debt consolidation may be right for you,connecting with an accredited debt consolidation company could be the next best step towards becoming debt free.
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.