To Consolidate or Not to Consolidate? That is the Question.
Yesterday, on a Sunday, the Fed cut the discount interest rate a quarter of a point and still the Asian markets tumbled this morning. The Fed also helped bail out Bear Stearns over the weekend and gave the green light for JP Morgan to buy out Bear Stearns for $2 a share. Bennie and the Feds were very busy this weekend. But what does this mean for the average guy on the street? Well, the interest rate cuts are good if you are in the market to borrow money or if you are looking to consolidate your debt?
The big question is should we consolidate debt or should we just tighten our belts, shut up, take our medicine and get down to the real work that needs to be done, like paying off our debts completely. Many different schools of thought will chime in on this one. But, in my opinion, you have to think about the big picture as well as the little items staring you in the face. Let's start with the larger picture. What is consolidation and how will it help me? When interest rates go down, some folks may consider taking on an additional line of credit called a consolidation loan to help them consolidate and pay-off some credit card balances. If this concept is taken to heart and applied correctly, it can be a very good way to reduce the debt quicker. But is this really putting a band-aid on a broken arm.
As a Board Certified Consumer Bankruptcy Attorney, I see people on a regular basis who have taken this step and wound up with an even higher debt load a year or two later. Why? Because those individuals didn't change their thought process. Let's face it, people use credit to buy things they probably don't need with money they haven't earned yet. So really what they are doing is paying a premium (interest) to change the date on when they can have stuff. After consolidating their debts, the same desires are still there and an open credit line or two is now available. Which means that I can buy more stuff that I do not need.
If people would look at the little items, like the credit card statements, and see what they purchased each and every month, they would be shocked at how they spend their money. It is my opinion that people need a reality check on their spending habits. If they can cure that symptom, then they can cure the debt problems. But, it's hard to look in that mirror.
I see people justify their spending habits each and every day in my offices. This weekend, I had the opportunity to hear it from the other side. I was in a consumer electronics store, and I struck up a conversation with a salesperson. She was very nice and talkative. She told me that people were coming in with their tax returns and snapping up blue-ray players and movies faster than they could restock the shelves. Hmmm, now that is interesting.
The Bottom Line is this: Are you disciplined enough to pay off the consolidation loan or are you going to run up the credit cards again? This is the question that you have to answer. I know most people are saying that a consolidation loan will offer them the flexibility to get their finances under control. However, isn't that really saying, ahhh the pressure is off and now I can relax. Hey look Best Buy is having a sale!
