Sunday, April 15, 2007

Debt Consolidation Loans Aren't Always A Solution for Credit Card Debt

Debt consolidation loans are seen as an effective way to eliminate debt. However, for people who have credit card debt caused by overspending (as most people who are in debt do), a debt consolidation loan is likely to only make your problems worse. Let me explain.

Debt consolidation loans are attractive for three reasons. First, they combine all of your bills into one place. You now need to make just one payment. Second, you can sometimes obtain a lower interest rate with a debt consolidation loan. This will save you money (great news!). Third, a debt consolidation loan will likely free up some credit on your credit cards.

This last point is really the danger. When there's suddenly credit available to you on your credit cards, most people -- particularly those who have a debt problem -- are likely to take advantage of it. The end result is that you end up with more debt.

This is the problem with debt consolidation loans. You now have the ability to put yourself into even more debt. Unless you change your spending habits, you are likely to put yourself into even more debt than you are in right now.

Take me as an example. I took out a debt consolidation loan when I was in $27,000 of debt. I thought the debt consolidation loan would solve my problems. Unfortunately, it didn't. I kept spending freely like I always had. In less than two years, I racked up nearly $30,000 more in debt. At that point I had well over $50,000 in debt.

I wasn't able to get out of debt until I changed my spending habits. I set a budget, stuck to it, and paid cash for everything. The budget allowed me to have a plan and to find a way to pay down my debt. I suggest you consider a similar plan (instead of a debt consolidation loan) if you want to eliminate credit card debt.

Michael M Thomas paid off over $50,000 in credit card debt. You can learn how Mike did it by reading his blog. Mike's Credit Card Debt website also provides a free newsletter which regularly provides money saving tips. You can learn more about it and sign up for the newsletter here.

If you are serious about getting out of debt, you should consider a product like Debt Free in Three. Mike talks about Debt Free in Three on his blog.

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