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The Debt Consolidation Danger

When you decide it’s time to shuffle things around to change your financial situation, consolidation can seem like an easy answer. If you’ve got several bill payments throughout the month at hefty interest rates, having a single lower payment can make a lot of sense. It can save you on interest, enable you to get a budget together and allow you to free up some cash flow.  But there’s a hidden danger in consolidations that you need to carefully consider before moving forward.

Don’t Run Up Your Debts Again

As soon as those credit card balances are cleared up by the consolidation loan cancel the accounts.  Far too many people consolidate mutliple times until they can do so no more. Many people will consolidate and then start racking up their credit cards all over again because now their maxed out cards have $0 balances.  so fast forward a few months and you’ve got that big monthly loan payment for your previous consolidation and you’ve now got credit card balances again and you’re suddenly so cash strapped that you’re barely making minimum payments (and sometimes missing payments altogether).

Avoid the trap by being pennywise and cancelling those credit cards once you’ve consolidated them. Instead of hanging onto them ‘in case of emergency’, save a cash emergency fund in a high interest bearing bank account that you can access if there is an emergency. This way you won’t pay interest when you use your emergency fund.

Staying on budget with a cash budget system like the money jar budget and using credit wisely can minimise those emergencies becuase you’ll have extra money for when it rains.

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