Paying off your bills requires financial discipline

Americans have too much debt. In fact, as a nation, we have more than four trillion dollars charged on our credit cards. that’s great if you own a credit card company, and bad if you are anyone else. There are no benefits to having credit card debt. You have to pay interest on that obligation and the rates are high, averaging 20% per year. If you fail to pay on time or even pay some other bill late, you could see that interest rate rise as high as 30% per year, making the debt even harder to pay off.

What do you do? The quick answer offered on television and elsewhere is “Consolidate your debt!” That’s a great idea - to a point. The notion is certainly simple. You take a number of different bills at different interest rates from a number of different creditors and you combine all of them into a single bill by taking out one huge loan to pay all of them off. Then you have just one bill to pay each month. If you do it right, you have a lower interest rate and a smaller monthly outlay. In theory, you can pay off the bills in less time this way and all will be rosy. That’s true, until something goes wrong.

What can go wrong with debt consolidation? The main thing is that in taking out a consolidation loan, you clear off all of your credit cards. That means that all of your balances are now zero. For a lot of people, the only thing that keeps them from spending more on their credit cards is the fact that they are already at their limit. If you haven’t been using your cards because they are full, will you be able to resist using them again once the balances are zero? If not, you will have a problem.
 

Debt consolidation doesn’t make your debts go away; it just moves them to another loan. In doing so, it also makes it possible for you to incur still more debt. In order for debt consolidation to work, you must find the will to stop using your credit cards until you have paid off the loan. Another problem that comes up with consolidation loans is that many lenders will set up loans with a repayment schedule that is longer than necessary. A few years ago, I called a bank about a home equity loan that I was going to use to combine some bills. Their first question was “Will ten years be long enough?” Long enough? I said that I wanted a loan for five years and no more. Sure, the payments were higher, but I paid far less money in interest. 

Saving money on interest is just as important as saving money on principal. If you aren’t going to save money, you might as well not bother. Combining your bills with a new loan is a great idea. Just make sure that if you try it , you are prepared to actually pay the loan off and not just use it as an excuse to start using your credit cards again.

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