People in debt have everyone and everything to blame for their current situation financial distress but not them. Few people even go a step further and blame it on the financial system and its practice as well as the laws that govern it. Well, ideally it is the behavior of the person that leads to debt which may at a certain point of time reach to unmanageable limits.
In such a situation where you find it is difficult to keep up with your monthly bills it is the same law that you may tend to blame that will allow you to either settle your debt or take out a debt consolidation loan. It will allow you to manage your debt and even come out of it.
However, both these debt relief options offered by the government have its characteristic pros and cons which you need to consider before deciding on a specific approach like these two or any other that you may find when you visit the official site nationaldebtrelief.com. If you do not then you will be back to the same position that you so badly wanted to be out of. You will once again start blaming the law or the financial system, the lender and their lending policies or at the maximum your fate but never yourself.
Ideally, it is your behavior that will lead you to such dire straits and there is no law that can regulate your behavior, well when it comes to managing your finance.
The reason for it
At this point you may tend to think why on earth will debt consolidation leave you deeper in debt if it is designed to do just the opposite? Well, it is a complex factor as behavioral aspect is complex subject and unique as well.
Psychologists as well as financial experts say that when you move your debt around with a debt consolidation loan or even by settling it for that matter usually gives you a sense of relief, albeit false one at it. This will make you feel better even when you owe money to your creditors.
The actual problem lies elsewhere and that is:
- Most of the debtors do not change their spending habit even after dealing their debts by settling or consolidating.
- They continue to be extravagant as before until the time situations go out of hand once again and is hard to manage.
That means you do not change a thing if you do not change your behavior.
The difference in the laws
It is a very good idea to consolidate your loans when you are struggling with your multiple debts. This approach will enable you to combine all of your debts into one single and easy to pay loan that will often have a lower rate of interest than all your loans rates combined and offered for a longer time as well. Though this will not lower the actual debt amount outstanding against your name, it will surely reduce a lot of other things such as:
- It will reduce the number of loans and monthly bills
- It will reduce your stress in managing or tracking a multiple of bills every month
- It will reduce the monthly payment for the lower rate of interest and
- It will reduce if not eliminate the chances of missing any payment and thereby damaging your credit score.
As far as your credit score is concerned, it is not affected when you opt for debt consolidation loan as it does not reduce the loan amount. Whereas, when you opt for debt settlement wherein a portion of your debt amount is forgiven, it will reflect in your credit history for seven years at least and damage your credit score as well. Apart from that, the law also allows the IRS to consider such forgiven amount as your income and therefore impose tax on it which is not the case in debt consolidation loan.
Taking out the real problem
As mentioned earlier, a debt consolidation loan or even debt settlement for that matter will not take out the real problem but will only mask it. This may lead to further problems and actually leave you deeper in debt. Since there is no law to control your spending behavior the consequence will largely depend on the way you view the money you receive and what you do or even not do with it.
It is very hard to move ahead if you have your finance in an absolute mess. You will not be able to do the necessary things that will help you in money management such as:
- Keeping a track of your spending
- Budgeting your household expenses
- Creating an emergency fund
- Getting adequate insurance and
- Saving for your retirement.
In such situations the best thing you do is look around you and see that several people use their debt to pay for things that they cannot afford, live beyond their means, and feels that it is normal to borrow money for these expenses.
But it is not logical to use your credit because it will hurt your credit score in the long run eventually. Even debt consolidation at times may affect your credit depending on the options you choose. If you opt for a credit card or a loan there will be a few “hard” inquiries and when it happens, your score is sure to take a dip.
This is because your credit score depends on the credit utilization which is the amount of debt you carry and the total amount of debt that is available to you. If you max out all your credit cards it will reduce the utilization ratio when you open a new one. On the other hand, if you combine all your debts into one credit card and the amount reaches close to the credit limit then according to the law your score will take a hit even if you pay off your other debts.
Therefore, always protect your credit knowing the law and what affects it and your credit history on any new consolidation debt.