Posted by Mike Smith :: April 1, 2008 @ 6:13 am

Here on the Lending Club blog, we often advocate consolidating your debt with a people-to-people loan from Lending Club. It’s important to remember that while debt consolidation is a great way to get your debt under control, it’s only the first step. Proper planning and further self control are also necessary for consolidation to have the desired effect on your finances.

Far too often, people consolidate their debt without planning how to control their spending. Wiping all of the debt off of your credit card is only going to help you if you stop using that card. So if you consolidate a card with a $5,000 credit limit, that doesn’t mean you have an extra $5,000 available to spend. If you do max out your card again, you’ll be even further in debt because you’ll have this new credit card debt plus the consolidation loan for the credit card debt you began with.

If you want consolidation to work for you, then you should probably cut up each of your credit cards as you pay them off. You don’t necessarily want to close those accounts though, since cards with zero balance and credit available tend to help your credit score. This is especially true if you’ve had the card for a long time. If you can’t live without having at least one credit card, that’s understandable, given the cashless society in which we live. In that case, use a P2P loan from Lending Club to pay off all of your credit cards and cut up all but the one with the lowest interest rate. Try to use that one card sparingly, if at all.

People who think consolidating their debt will solve their money problems need to reconsider that idea. It certainly has the potential to help, but it only works to its full potential if other constructive activities are also implemented. Changes in spending habits and understanding the reasons for getting into debt in the first place are required as well.