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We’ve all seen the reports on the news about how difficult it has been to obtain credit these last seven years, and it hasn’t gotten all that much easier since the announcement that the recession was “officially over.” While some people are indeed feeling the recovery, for many others most forms of credit have remained all but unobtainable.
There are, however, some credit vehicles that have remained available to many people throughout the difficult times, and which have continued to grow in popularity even more as the economy continues to recover. Unfortunately, many of these credit resources are very expensive, and could put the borrower at risk for even greater expense. Even more worrisome is that the approval policies for some forms of credit are structured to serve primarily higher-risk individuals, posing the same danger to the credit system as a whole as did the failed derivatives that were at the center of the near-collapse of the financial industry in 2008.
Personal Debt is Soaring
According to analysts at NerdWallet, as of the third quarter of 2015, the average U.S. household with debt carries $15,355 in credit card debt. That figure should give anyone pause. Even when other credit resources were unavailable or so conservative as to render them unavailable to the vast majority of individuals, credit card companies were less eager to lower account holders’ balances or cut them off completely, because the high interest rates and penalties charged on many if not most of those cards was just too lucrative to give up unless absolutely necessary.
The cost of that debt is soaring to an even greater degree. As cardholders use their cards more, including to pay recurring living expenses while paying at or near the minimum on a monthly basis, the balances on their cards never go down, as every cent of those minimum payments is applied to interest. Unfortunately for the cardholder, that interest continues to compound faster than the minimum payments can keep up with. When a person holds several credit card accounts, it can be awfully tempting to use the available balance on one to pay off or even make current payments on the others. It is a shell game in which the cardholder is always the loser.
Salaries Have Flatlined for Decades
The Economic Policy Institute reported that between 1945 and 1973, the hourly wages of most workers increased by 91%. During the period of 1973 to 2013, however, the hourly wages of a typical non-supervisory worker increased by only 9%, while worker productivity soared. Consider also that $100 in 1973 dollars, when adjusted for inflation, was the equivalent of $540 in 2013.
It is obvious that the economic deck is stacked against the average worker getting ahead.
So how can you reshuffle that stacked deck?
For some people, debt consolidation is the best solution to the problem that may very well be keeping them up at night. Instead of continuing to juggle payments among numerous creditors, you take out a new and bigger loan that consolidates the debts, so you will be paying only one bill to the new creditor. Most likely your monthly payment will be lower than the combined payments of your previous debts. Although some types of debt management or settlement, as well as bankruptcy, will put a “ding” on your credit report, debt consolidation won’t damage your credit because you are still paying off the entire amount you owe. If handled responsibly, debt consolidation can be the best way out of the hole in which you’ve dug yourself.
But it is important that you choose your lender carefully. When choosing a debt consolidation lender, don’t just settle for the company that promises the best average reduction in the amount of your debt. Consumer advocate Saundra Latham advises that the best debt consolidation lenders offer a balance of low fees, competitive interest rates, and flexible terms. Transparency and longevity are also important factors to consider, as well as credibility (it helps if you’re able to read other customers’ reviews of the lender). It is essential that you research your options using resources besides the lenders’ own ads and web sites.
Also be aware of the cons as well as the pros of taking out a debt consolidation loan. For instance if you use a secured loan, you risk losing the collateral associated with the loan (e.g., your house) if you fail to make payments. An unsecured debt consolidation loan is less risky in that regard, but you can still risk ruining your credit if you can’t keep up with payments. A debt consolidation loan is not without risks; many financial gurus warn against it unless you are truly struggling to make minimum payments, and — most important of all — have committed to turning over a new leaf with your spending habits. Also keep in mind that with a debt consolidation loan, you are fighting debt with more debt, and it may take years to pay it off.
For some people, however, debt consolidation is their last best hope. Though it may seem counter-intuitive, if handled responsibly debt consolidation can ultimately be the best path out of debt and back to creditworthiness.