Guide to Debt Consolidation Chapter: 1 2 3 4 5
Understanding Debt
Lenders have done such a great job of positioning debt as the American way of life, most people now use credit as if it were the same as cash. But let's face it…your high limit credit card is a poor substitute for a hidden stash of gold coins. If debt consolidation is on your mind, now is the time to review the good, the bad, and the ugly sides of debt.
The Good
Debt is best suited for large purchases that provide long-lasting benefits. Cars, real estate, business investments, and college tuition are the most obvious examples. Each of these will provide dividends to you, financial or otherwise, over a period of at least a few years, if not for the rest of your life. Taking on debt allows you to spread out your costs over the long-term life of your purchase.
The Bad
Credit is commonly used for consumer desirables like new clothes, restaurant meals, weekend trips, and electronics equipment, to name just a few temptations. Buying a high-definition TV on credit isn't automatically a bad thing, but it would be if you already have high debt balances. Charging a new suit for a job interview might be okay, too, but not if you haven't finished paying for the last suit you purchased.
The Ugly
Debt balances can quickly spin out of control, particularly if you're paying for purchases that no longer provide any benefit to you. Imagine buying a car and financing it for 20 years. After 10 years, that car is worthless, and you'll need to buy another one. You'd have to take out a new car loan and continue paying the old one at the same time! Seems pretty inefficient, right? But that's exactly what people tend to do with their credit cards, or other kinds of debt financing. And that's when things get ugly.
Think about your situation. Have you been too liberal in reaching for the plastic for non-essential purchases of short-lived items? Or have you stretched yourself thin with too many future-oriented investments? If you're in financial trouble, debt consolidation can help.
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