3 Truths That Can Keep You Entangled in Your Current Financial Chaos

A debt consolidation loan is an ideal tool to bail you out of your financial mess. However, it's only a short term solution and unless you change your way of life, you'll be only contributing to the lending institution's bottom line in the long run. This article covers some important facts that you can use to analyze your current situation and make changes that'll help you improve your financial status in the future.

Regardless of whether your current financial problem is temporary or recurrent, you need to change the situation as soon as possible. A debt consolidation loan can lessen your monetary burden but you must be careful. It is very critical to evaluate whether your present financial situation is due to some unanticipated event or because of your financial way of life. Failure to do so will only make the situation worse than your present condition.

To explain in simple words, take an example of starting a food regimen. Most of us have experienced this one time or the other. You go on a strict regime for some time, lose weight, only to see it coming back with vengeance within 6 months. Most of the time, it's worse than before. Same is the case with your spending habits and debt. A debt consolidation loan will help you initially but if you fail to change your lifestyle and spending habits, your debt will most likely return in a year or so. This time however, you won't be able to raise yourself out of the financial mess with the help of a loan.

Truth #1: Almost 75-80% of US citizens who take a loan to pay off other loans or high interest credit, land up in more bigger financial mess within 2-3 years. Failure to change their way of life proves to be the major factor. A study showed that expenses made using credit cards were 14% more than same purchases made through cash. It is very easy to live beyond your means when you don't have to bear the burden of paying money upfront. This habit is dangerous and should be curtailed in the beginning itself.

Truth #2: Credit card companies are here to make profit and their agreements are structured in such a way that they extract the most from you, when you are vulnerable. It is very easy to fall into the habit of making the minimum payment and carry the balance to your next pay period. Consider this. Once you get used to paying only the minimum payment, or little more, it could take, almost 20 years to pay off a 16% credit card with a $12,000 balance if you make only the minimum payment! During that period you'll be paying $16,000 to $20,000 in interest payments alone! Which simply means you'll have to earn almost $45,000 (before taxes) to pay of your original debt of $12,000. Credit cards often give you the boost to make trivial expenditures, which slowly add to cripple your financial independence.

Truth #3: It gets more difficult to prevent inadvertent late payments, when you manage several credit cards. Credit card contracts are structured is such a way that they give the credit issuers power to instantly raise your credit card's interest rate when you make a late payment. It does not mean skipping a payment altogether or being 10-15 days late. It can happen even if you are late by a single day. This can make your dearer by thousands of dollars in interest over the life span of your credit card.

One secret that many are not aware of is that unless you call them and request, credit card companies won't lower the rate back to previous one. Many will lower the rate after a specific period of time but you need to call them and request. One important thing to keep in mind is that if the late payment is over 30 days late, it'll be reported on your credit report, seriously affecting your credit score, which you wouldn't want at any cost. This low score can be exploited by other credit card companies to raise the interest rate on all your cards.

Summarizing the above facts, debt consolidation can prove to be a great instrument to bail you out of your financial mess, but like all instruments, it must be used with caution and make sure you are using the right one specific to your financial state. A debt consolidation loan eliminates the chance of inadvertently making late payments on your credit cards, thereby affecting your credit rating. However, unless you change your way of life, they are only a temporary solution.

Conclusion: Take the shelter of a debt consolidation loan only after you have thoroughly analyzed your financial situation and selected the right one, with low interest rates and no hidden costs and fees.

About the Author:

Steve Faber writes about a multitude of business and finance topics. He has been a principal in several businesses both online and bricks n' mortar, including one that grossed over $1.5 million a year. See the Debt Consolidation Loan and Finance Guide for what you must know about getting out of debt and staying that way.

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