How to Make Debt Consolidation Truly Work For You


The problem with debt consolidation is that there’s so much hype around it that you can bet that there’s only one true winner. You might think that the person who wins out with debt consolidation is the person who is having his or her debt consolidated. This is not usually the case. In fact, in a large number of cases, this is the last person you would consider to be the true winner of a typical consolidation scenario.

So who comes out smelling like roses? Who comes out with a tremendous benefit? It doesn’t take a genius to figure out who this person is. It’s the person behind the company that facilitated the debt consolidation process. That person is the true winner. You have to wrap your mind around this and accept this central fact. Otherwise, you will not have the proper mindset with which you can truly make debt consolidation work for you.

Nine times out of ten, if you’re the typical consumer, you would just focus on putting out fires right in front of you. While there’s a lot to be said regarding that mindset, try to think several years down the road. If you were to look at debt consolidation in very shortsighted terms, you’d think that it’s a slam dunk. You’d think that there’s really nothing to decide because this is the best way to resolve all your bad financial decisions and mountain of debt.

The problem is, you will be living with the consequences of the consolidation process for many years to come. You have to understand that consolidation doesn’t wipe out your debt. This might be the first time you’ve heard of this and you might be shocked, but let me repeat it again. Consolidation does not wipe out your debt.

Wiping out your debt, of course, means reducing the total principal due. That’s not going to happen. Lenders who lent you that money are not in business to lose money. That’s why they are going to hang on to that principal for dear life.

So what exactly is happening? Why is it that after you go through the consolidation process your monthly payment due actually shrank? What’s going on? Well, it’s actually pretty simple. The reason why your monthly debt payments are more manageable is because the debt consolidation company simply worked with your lenders to stretch out the repayment time period. In other words, you have put yourself on the hook for a much longer time.

It may seem like an awesome idea now, but if you hang on to your bad financial habits you’re probably going to end up in the same deep debt hole that debt consolidation got you out of. Do you see what’s wrong with this picture? Do you see why this could be a problem? Can you see why debt consolidation can be a trap?

The sad reality is that most people look at this process as a short-term solution. They think that it’s some sort of magic financial pill that they just need to take and all these nasty headaches will go away. Well, that may be true, but you are actually signing on for a longer commitment. Sure, it may be a pain in the butt to pay $1,000 or $2,000 every single month to your creditors, but if you think about it paying $200 a month for decades is actually much worse.

In terms of the absolute dollars that you’re going to have to let go, your post-consolidation financial picture is actually worse. As mentioned earlier, if you insist on hanging on to your bad financial habits and you don’t change how you handle your money, debt consolidation can actually prolong your financial pain. If you think that you’re frustrated now in dealing with those fat credit card bills at the end of every month, imagine seeing a consolidated amount month after month for a long, long time to come. On top of that, you then rack up new debt because you did not get your financial house in order.

It can easily lead to a nightmare. I’m not saying that consolidation should be completely off the table for you. I’m not saying that at all. What I’m saying is that you need to use consolidation in such a way that you come out smelling like roses. Your number one loyalty should be to yourself, not to your lenders, and not to the institutions behind your loans. Unfortunately, if you were to simply use consolidation as some sort of short-term fix to get from point A to point B you are just wasting your time. You’re eventually going to end up in the same bad financial shape and chances are bankruptcy would be too little too late.

Use the debt consolidation as a springboard to better financial health. How do you do that? First, use consolidation to freeze your spending. Now that you have gotten your monthly bill down to a manageable size, look to free up income. How do you do this? Freeze your spending. This may seem impossible at this point, but you’d be surprised as to how much fat there is in your personal budget.

Look hard and comb through your budget, you’d be surprised as to how many luxuries you’re actually wasting money on every single month. Free up that cash, use that cash to build up your savings, and then invest that money so you can grow the cash that you freed up.

Use consolidation as cover for increased income

Now that you have decreased your monthly financial pain level, the next step is to free up that cash and invest in yourself or otherwise invest in income producing activities. Maybe you’d invest the money in a partnership or maybe you’d buy stocks. Whatever the case may be, figure out a way to free up the cash, so you can increase your income.

Make sure to take advantage of payment acceleration clauses

Depending on who handled your debt consolidation case, there may be payment acceleration clauses I your payment schedule. Take full advantage of these because when you take advantage of these you’ll drastically decrease the principal amount that you are paying. Eventually, you may be able to position yourself in such a way that you are able to get out of debt sooner rather than later.

Make no mistake about it, the debt consolidation process can be an opportunity. You have to look view it with the right mindset. If you see it as a springboard to better financial health, the first step is to change how you view and handle money. The next step then is to try to free up as much of your income by reducing your expenses. By making these small but significant changes, you can go a long way in financial setting your financial house in order.