Lasting Effects of The Great Recession
The last four years have been very brutal economically for many people in this country. The financial collapse of 2008 and the following great recession have led to years of high unemployment, home repossessions, bankruptcies, and problems with debt management. Although some parts of the economy and the labor market are starting to slowly recover, there are many homeowners who remain “underwater” and too many people are still struggling with debt.
Credit Cards Can Get Out of Control
For anyone who has been living with unemployment or underemployment for the past few years, credit cards can initially seem like a necessary solution to ensure survival. However, credit card debt can quickly get out of control, even with steady employment. Of course, credit card debt will be an even greater problem if a person remains unemployed for more than a few months.
Is Loan Consolidation the Right Solution?
One common solution that is sought by many people who find themselves with debts that have become out of control is to refinance all their short term credit card debts. They visit the bank and have their short term loans consolidated into one long term loan at a lower interest rate and a fixed term.
In theory, this solution ought to work for most of the people who try it. Short-term revolving debt at high interest rates traps many people in financial quicksand they cannot escape. Loan consolidation does appear to be the perfect solution. However, many people find that just a few years after having all their loans consolidated they are back in the same financial predicament again. They wonder how it could have happened when they thought that the previous loan consolidation would take care of the problem.
They remember how the loan consolidation actually seemed to help for a year or two so they immediately try to use loan consolidation again.
Why Loan Consolidation Does Not Work
So why is it that another loan consolidation is often needed again just a few years after a previous consolidation? The reason is that very few people understand that loan consolidation is not really the correct solution to their problem. The problem is that more money is being spent than the person can afford.
Effective Debt Management Requires New Strategies
Debt consolidation will only work if overall spending decreases and/or overall income increases. New forms of revolving debt such as credit card debt and lines of credit must be avoided and a regular savings program should be set up to prevent future problems.