Are you considering debt consolidation without debt review or debt counseling? Let’s be clear: Debt consolidation without debt review is like jumping overboard without a life jacket. You might be able to swim to shore, but chances are you’ll drown.
Obviously, you want to avoid that. So know that debt counseling is the lifeboat that can bring you to a safe port in the storm. The importance of these two elements of debt management should not be underestimated. In this article, we’ll explain why.
Deciding to Deal with Your Debt
Applying for a debt consolidation loan or balance transfer credit card is a decision that should not be made without first doing some homework.
The “debt review” portion of this process can involve getting a handle on exactly how much you owe and to whom. “Debt counseling” is asking for help from someone with experience managing debt.
Another way to look at this is to treat your debt review as an orientation class and debt counseling as the school’s guidance office. They’re both tools to help you get a firmer grasp on your personal finances. The review is mandatory just to get started. Counseling is available if you feel you need it.
Begin with a Debt Review to Establish a Baseline
Consolidating credit card debt is an exercise that can save money and make paying off debt more manageable. That can also go a long way toward reducing your money stress. To be more specific, you’ll need to know how much your debt currently costs you and whether a debt consolidation loan will be cheaper to maintain. The first part of your debt review should provide you with the numbers. You’ll gather your current balances and APR (annual percentage rates) on your credit cards, student loans, car loans, and other lines of credit. It’s also helpful to note your minimum monthly payments as well.
A critical element in this exercise is determining the cost of debt for each of your accounts, not just the balance. Credit card companies charge variable interest rates on unpaid balances. They also charge fees which may be included in your monthly APR. Those are all part of your cost of debt. Figure out what that is, and then (and only then) will you be ready do the math to see if debt consolidation will save you money. Online calculators can help you compare and contrast, but before moving onto that, get a fuller picture of financial standing.
As you are doing this debt review, take a holistic look at your finances. List all your expenses, and get a handle on how your after-tax income goes towards spending, debt, and savings. In terms of non-essential spending, you might find ways to open up wiggle room in your budget so you have more funds to pay down debt. That could mean eliminating expensive cable TV channels, eating out less often, and buying generic brands when shopping.
Or perhaps you’ll see that your expenses are so steep, you might want to consider taking in a roommate or moving to a less pricey neighborhood. This kind of research on your finances can help you understand how the debt accrued in the first place and help you work towards better financial health. Skipping this step is debt consolidation without debt review. Your expenses count in the equation, so get familiar with them.
Consequences of Debt Consolidation Without Debt Review
Remember that jumping overboard analogy? Debt review is a preparation step in the debt consolidation process. Think of it as putting on a life jacket. So why does not reviewing your financials lead to this “drowning”? It could happen in a variety of ways.
- You might not be able to keep up with the payments you’ve agreed to (because you hadn’t done enough research) and wind up with late payment fees and a lower credit score.
- You could fail to save money for an emergency fund, your child’s education, or your retirement because you’re struggling and make an uninformed choice.
- You might wind up defaulting on a loan you can’t afford.
Debt consolidation is a mathematical exercise. Like any other math equation, there needs to be specific numbers used for calculations. A debt review determines what those numbers are. Debt consolidation can’t work for you if you don’t know those figures. Do the math carefully to ensure you get the most out of the process.
Consequences of Debt Consolidation Without Debt Counseling
This part is also a big deal. Before asking for help, you must assess your ability to receive it and to get the right kind of support. This is especially true if this is your first time seeking help with the amount you owe. A debt counselor could help you avoid some of the mistakes people make when consolidating debt.
A debt counselor could help you choose which lender to do business with. They could help you with your debt review, go over your budget, and show you how to cut down expenses. They might also suggest debt settlement if your situation calls for it. (We’ll clarify what that means below; it’s not the same as debt consolidation.)
Many debt-counseling services are non-profit or subsidized by local businesses or government agencies. Banks and credit unions also offer debt counseling services for their customers, so you have plenty of options. Asking for help in this way can seem daunting, but it can have tremendous upsides.
What’s the Difference? Debt Consolidation vs Debt Settlement
If you are looking for a way to lighten your debt burden, you will likely encounter the terms debt consolidation and debt settlement. Though they may sound similar, it’s’ important to know the difference.
- Debt consolidation is combining several debts into one debt. This is more commonly done by taking out a personal loan and using it to pay off all your credit cards. It can also be accomplished by using a balance transfer card that offers a low interest rate, but that option is less common, particularly when interest rates are high, as they are now.
- Debt settlement, on the other hand, involves offering less than what’s owed in exchange for discharging an overdue debt. Debt counselors might recommend this option as an alternative to debt consolidation if you’ve fallen several payments behind on your credit cards. Some may even recommend you intentionally fall behind on payments, as this can make debt settlement possible.
Now that you know the difference, also be aware that debt settlement can have consequences that debt consolidation doesn’t. The missed payments stay on your credit report for up to seven years, and you may be required to pay income taxes on the unpaid portion of your credit card debt (as the IRS recognizes that write-off as income). It’s important to consider these points as you decide what is your best option to deal with debt.