Americans are ‘Sleepwalking into a Debt Crisis’: Consolidation No Longer the Safety Net, Expert Warns

In recent years, debt consolidation via personal loans has been lauded as a smart financial move for people grappling with burdensome credit card debt. The strategy seemed simple: secure a personal loan at a lower interest rate to pay off high-interest credit card balances. But new findings indicate this relief might be short-lived, leaving many Americans back where they started, if not worse off.

A concerning pattern has emerged. According to a recent TransUnion survey, borrowers who utilized personal loans to consolidate credit card debt witnessed an average balance reduction of 57%. However, alarmingly, many of these borrowers found their balances creeping back to their former levels just 18 months later. Other research revealed that borrowers were accumulating credit card debt a mere three months after debt consolidation.

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According to the Experian Consumer Credit Review, the average American has a credit card balance of $6,194. One might ask, therefore, what’s leading Americans back into the treacherous waters of credit card debt?

There are several reasons why the debt-reduction approach, using personal loans, isn’t effective, says personal finance expert Deacon Hayes of “Using personal loans to pay off credit card debt only works if borrowers modify their credit card habits after consolidation. Unfortunately, it is increasingly difficult to do so. This is because everyday items at the store cost more. Eating out costs more. Borrowing money to buy a home costs significantly more. With higher prices and wages not keeping pace with inflation, people have turned to credit cards to offset the difference. The challenge is that many of these credit card interest rates are over 20% which can make it hard to pay off when you are just paying on the interest.

Adding to the gravity of the situation, it has been widely reported that credit card balances have surged to record highs. These revelations are not just numbers but indications of an impending financial predicament.

Those with a high debt-to-income ratio will be at most risk – especially those with student loans. On October 1st, the student loan payments are going to resume which will only add to the difficulty of Americans to get ahead” adds Hayes.

Given the situation, what can be done? Hayes offers the following advice:

  • Make every effort to pay down your consumer debt quickly by using the Debt Snowball method.
  • Get a side hustle to bring in extra income to pay it down faster.
  • Scrutinize every expense on your budget and ask “How can I make this expense smaller”?
  • Take any extra income like a tax refund, inheritance, or bonus at work and put it toward your debt.

However, relying solely on these immediate fixes without addressing the root causes of debt accumulation might only defer the inevitable, adds Hayes:

Long term, you want to create a plan to live on less than you make by sticking to a realistic budget. Establish an emergency fund of at least 3 – 6 months of your living expenses. If you use credit cards, consider limiting the use to only fixed expenses. This minimizes the opportunity of overspending and not being able to pay off the card in full each month.”

Hayes continues: “In a world where financial pressures are mounting, people are sleepwalking towards a potential debt crisis. Debt consolidation, once seen as a lifeline, has proven to be a fleeting solution for many. The rising tide of credit card debt, coupled with soaring costs of everyday living, has pushed many back into the jaws of financial uncertainty. It’s a precarious situation. And now, with student loan payments set to resume, those with high debt-to-income ratios, especially those burdened by student loans, face the greatest risks. As we navigate these uncertain times, remember: It’s not about how much you earn; it’s about how well you manage what you earn.”

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