7 Careful Steps To Consolidate Debt Without Tripping
Finding yourself in more debt than you can handle is a scary place. I am sure many of you reading this post can relate to the feeling of complete despair when it comes to your bills. You have more bills coming in than you have money to pay them. When you get to this place, you feel lost. You feel like you have no where to turn.
I am here to tell you that you have options. There is something you can do to take control of your debt. Not only am I going to explain how to get out of debt, but I will list the steps to consolidate debt. The key is for you to take control of your finances. Recognizing that you are at a point where you feel like you have no control is an important step to gaining control. Continue reading to find out how to get a consolidation loan.
What Is Debt Consolidation?
I have found that the best way to feel comfortable with something is to fully understand it. I want to define debt consolidation for you. That way, we’ll make sure you know what it means. Then as you move through this post, you will read the steps to consolidate debt. USA.gov considers debt consolidation to be a strategic way to address your finances.
It is you taking control of what is happening with your money. Prior to debt consolidation, you may feel out of control. This is the opportunity for you to regain control. During debt consolidation, you merge many different bills into one debt that you pay off with one monthly payment. You can do this by applying for a loan to get out of debt or using a debt management company. You should know that a debt management company charges fees for their services. It’s important to know you can do this on your own without their extra fees!
Debt consolidation works well for credit cards with high interest. When it comes to high interest credit cards, you often find yourself in a terrible cycle of only paying the minimum. Consider this, you owe $5,000 on your credit card. It has a 20 percent interest rate. You can only pay the minimum amount on your card, which is probably around $300, give or take.
That only brings your balance down to $4,700 which is hit with another finance charge. If this cycle continues, you are only making a small dent in the money you owe. Now, imagine this is happening with multiple credit cards. You are never truly able to get in front of the debt. You are always feeling behind. Sound familiar?
Pros To Debt Consolidation
One of the benefits to taking steps to consolidate debt is you finally can stop drowning in bills. You merge everything into one monthly bill. You do not have to apply for a loan. There are other ways to consolidate debt without needing a loan. The biggest advantage to debt consolidation is probably the most obvious, it allows you to merge all of your debts together into one larger debt. This gives you the opportunity to focus on one debt and one payment instead of multiple ones.
One payment is so much easier to manage than multiple different ones. It is easy to be in control. It is easy for your brain to wrap around one payment and the total amount getting smaller. Debt consolidation can improve your credit as you begin to work away at it. As long as you are making consistent monthly payments, you are decreasing your debt with every payment. This also decreases your debt to income ratio. This is the amount of debt you have compared to your income.
Debt consolidation can help you to feel empowered since you are taking control. You are able to make more than just the minimum payment. Your payment amount will not change because you have used your credit card. This is a static payment, so you always know how much you need to pay. This also may be room for you to make more payments in one month.
Cons To Debt Consolidation
As with anything, there can also be some negatives to taking steps to consolidate debt. I want you to have all the information, so I am going to share the potential downside to consolidating your debt. The biggest negative is the interest rate. You may end up with a high interest rate on any loan you get.
This is especially true if you have poor credit. However, once you have locked in an interest rate, as long as you have a fixed rate loan, that amount will not change. It is still going to take you a long time to pay off your debt. Consolidating your debt does not shorten the repayment in any way. However, with each payment, you are decreasing your debt. This may not be true prior to consolidation.
Unless you close your credit card accounts, they are still available for you to use. There is a high chance you may increase your credit card debt again while still paying the consolidation loan. This is a dangerous place to be. You are just piling debt on top of debt. You have to change your habits for this not to occur again. This means you have to truly take control of your spending. Credit counseling may be a good idea so that you can gain an understanding of how credit works.
Will Debt Consolidation Hurt My Credit?
Chances are if you are considering debt consolidation, you credit is not in the best shape. I am going to guess that you have a lot of debt that you are having a difficult time paying. The higher your amount of debt, the greater the impact is on your credit. Your debt to income ratio is most likely high, which is also harmful to your credit score. Typically, consolidating your debt MAY ultimately improves your credit. You may seem a slight dip in your credit score as you are in the process of obtaining a loan, or working through consolidation. Chances are, your credit score is already low enough that a slight dip does not make much impact.
On the other hand, taking steps to consolidate debt may improve your credit score. Essentially, you are paying off all of your debts and creating one larger debt for yourself. This gets those other debts paid off quickly, which can improve your credit rating. By focusing on just one payment, you are be positioned to pay it on time. Making timely payments and not missing any months can help improve your credit score.
Step 1 – Know Your Goal
“Winning at money is 80 percent behavior and 20 percent head knowledge. What to do isn’t the problem; doing it is. Most of us know what to do, but we just don’t do it. If I can control the guy in the mirror, I can be skinny and rich.”
― Dave Ramsey,
When you begin to consider consolidation, there are some things that you should do. There are smart steps to consolidate debt. The first step is to understand your goals. The most obvious goal may be to get out of debt. Or, maybe you will say to stop making so many payments that do not get you anywhere. Now is the time to really understand your financial goals.
You should create long range and short range goals. A long term goal may be to save towards retirement, so that you are able to retire someday. Another long term goal may be to have a specific amount of money saved in ten years. A short term goal may be to begin saving money. Another short term goal may be to save for a vacation you have always wanted to take. In addition to pulling yourself out of debt, there are probably other things you would like to do, too.
Consolidating your debt can give you the freedom to begin to think about these goals. You also want to make sure that consolidating your debt will not stand in the way of your other goals. Make sure that any debt consolidation program you enter does not freeze your credit cards, or any of your assets. You might need access to them. If any of those are frozen, be sure to know how long before you are able to use them. Some programs freeze your credit cards until you are able to pay off the balance. Make sure you know all the details of any debt consolidation you consider.
Step 2 – Gather All Your Debts
As part of your steps to consolidate debt, you must gather all the information about your debts. Until you gather all of this information, you probably do not know the gravity of the situation. You cannot begin to solve your debt problem until you know how deep it is. You should contact your credit card companies and any loans you owe to get the pay off amount. That amount may not be what you think, so you should always check.
Depending on your interest rate and when you make your last payment, the pay off amount is changeable. You should make sure you are working with the most accurate numbers. Be aware of the current interest rates on loans. This could significantly impact how much money you are going to pay while in the process of paying off your debt. If you know the current interest that you are paying, then you can work to get a smilier or lower interest rate. You can use a debt consolidation calculator to help you determine these numbers.
Do not stop paying on your current debts just because you are considering debt consolidation. You still need to continue to pay your debts until you know they have been paid off by another party. If you choose to stop paying your debts, you can be hit with fees and penalties. This also negatively impacts your credit score. You should also make sure that none of your existing debtors charge a penalty, or fee, for paying off the debt early. If all of your debtors charge this fee, that can get pretty high for all of your debts.
Step 3 – Take A Look At Your Assets
One of the steps to consolidate debt that many people overlook is reviewing your assets. Your assets could be your home and any vehicles you have. You may have other valuables that could be considered an asset. All of your savings, investments and retirement plans are also considered assets. Make sure you list them when looking at your assets.
When you are considering which debt relief strategy to use, applying for a loan or a debt management company, your assets may make a difference. Some debt management companies may encourage you to use your assets to pay off your debts. You could sell some of them to make the money to pay your debts. This is not always the best idea. Keep in mind that paying off your debt is a short term goal, but saving for retirement is a long term goal. Protecting your assets may be a good way to protect your financial future.
Step 4 – Understand Your Credit Rating
It is always important to understand your credit score before you take steps to consolidate debt. The reason is your credit score can impact the interest rate you receive on any type of loan that you want. A low credit score will cause a higher interest rate. You may ultimately pay more to pay off your debts. To illustrate my point, I will give you an example.
If you have a good credit score of 650 or higher, you can get an interest rate of around 15 to 16 percent. Once your credit score begins to drop to 640, which is only a 10 point difference, the interest rate goes up to 20 percent. That is a huge jump! Say you have a debt of $5,000 and interest of 15 percent, you end up paying $750 in interest. When that percentage jumps up to 20 percent, you are now paying $1,000 in interest. That is a large increase and it feels like it takes forever to pay off that amount of debt.
Once you are in this position, your debt has already been impacted and it is hard to correct quickly. You can make positive impacts by reducing your debt as much as possible and making regular monthly payments on time. It takes consistent work, but it is possible.
Step 5 – Look At Your Budget
Now that you have an understanding of your debt, the next steps to consolidate debt are to understand your budget. It is great that you know how much you have to pay in debt. It is just an important to understand how much money you have to pay that debt. If you cannot pay all of your debt before debt consolidation, you may not be able to pay the debt consolidation amount. It is important to look at what you can afford to pay.
For the moment, you should put all of debts aside that you plan to consolidate and look at all of your other expenses. Make sure you use a budget application to track all of them.
Smart Money Tip!
After you have listed all of your debts, you should then list all of your income. You should also be clear about the source of your income and if it is a regular source of income. If you are self employed, you may not have regular income and that is important to note. You should also list any savings that you have. It is important to know if you are willing to dip into your savings accounts to pay off your debts.
Step 6 – Understand Your Options
When you are taking steps to consolidate debt, there are a few consolidation options available to you. Even though some of these options may not make the most sense for you, it is important to know they are available to you. As a result, I am going to briefly outline them for you.
There is a debt consolidation loan, which is an unsecured loan that you borrow from a lender to pay off all of your debts. You would determine the pay off amount of all of your debts and apply for a loan for that amount. When you are approved, the lender gives you the money. You are responsible for sending the payments to the debtors to pay off those loans. You then have one debt that you pay every month. This amount does not change providing you have a fixed interest loan.
If you own a home, a home equity loan may also be an option for you. This is a secured loan, because your home is collateral. These loans tend to be at a lower interest rate. You are, however, risking your home. If you do not pay back the loan, you could risk losing your house. You want to make sure if you go this route that you can pay back the loan timely. You do not want to risk losing your home.
A balance transfer may also be an option for you, particularly if you have a lower amount of debt. This does require you to open a new credit card. You can transfer the balances of other credit cards to that card and pay it off at 0 percent interest. Ultimately, this allows you to pay less money in the long term. You want to ensure the credit card allows you to transfer balances and has 0 percent interest on balance transfers. You also should verify that you can transfer your existing balances to the new card.
Some cards have limitations on what you can transfer, so you want to ensure you can transfer the old balances. Another thing to consider is there is usually a time limit for paying off the balance transfer. You may have 18 months to pay off the balance at 0 percent interest. Be aware that if you have no paid off the balance within the 18 months, you will be charged interest all the way back to the date of transfer. Make sure you read the fine print and understand the terms to which you are agreeing.
Another major option available to you is a debt settlement company. This includes an expert in debt consolidation to help you. You receive a debt counselor to create a debt management plan with you. This debt counselor helps you to put together a plan that is specific to you and helping you in your particular situation. The credit counselor takes on the burden of paying off all your debts. They will contact all of the companies and ensure all of your debts are paid, so you do not have to handle that on your own. You want to make sure you pick a company in which you feel comfortable working. Keep in mind that debt management companies charge fees to handle your debt management plan. You want to make sure that you are aware of the fees up front before you agree to working with the company.
Step 7 – Decide If You Need A Debt Manager
Using a debt settlement company or manager may sound like a great way to do. They handle many of the steps to consolidate debt for you. You do not have to reach out to your creditors because they do it all for you. If you are sure that you do not want to get a personal loan and you feel you could benefit from credit counseling, then debt consolidation may be for you. If you do not mind paying the fees, then it could be the proper route. In reality, you must decide if a debt manager is the best decision for you based on your individual circumstances. Maybe the thought of dealing with all of those lenders gives you anxiety. Then paying the fee is worth it to you because it takes away that burden.
Is Loan to Consolidate Debt Right For Me?
I know you are not going to like this answer, but it depends. Taking steps to consolidate debt may be the right think for you if you are drowning in debt that has no end in sight. If you feel like you cannot get your bills paid per month because all you can afford is the minimum payment, then you should consider consolidation. If you just do not feel like dealing with three different payments per month and you want a simplified way to handle your bills, maybe you should not consider consolidating.
You have to decide for yourself if taking steps to consolidate debt is right for you. There are many different ways to address debt consolidation, so maybe if you should consolidate your debt is not the right question. Maybe you really are asking how should you consolidate your debt. Arming yourself with all of the information is the best way to answer this question. When you know all of the options available to you, you are better able to answer that question.
After reading all of the information above about steps to consolidate debt, if you still are not sure, maybe you should talk to a financial advisor. Taking on more debt, even to pay off other debts, is not something that should be taken lightly. If you are not sure if this is right for you, you should not rush into it. I have outlined all the steps to consolidate debt. You need to make sure you can afford the consolidated payment amount.
It is reasonable to think that combining all your bills into one debt decreases the amount you pay each month. But, that is not always the case. You need to first understand your budget and how much money you can afford to pay each month. You must then understand how much your total debt is. Then you can take a look at what kind of interest rate you can get for a loan in the amount you need. Can you afford to pay the every month for the length of the loan?
Will a lender give you the money you need to pay off all your debts? If the answer is no to either of those questions, this process is not for you. Paying off only a portion of your debt is dangerous because you now have a higher monthly payment for the consolidated debt plus all the leftover debt. If you cannot afford to pay back the loan or the interest is higher…DO NOT DO IT. You will just put yourself in a worse financial position by obtaining a loan you cannot afford. That will be more stressful and negatively impact your credit. Take all of your options into serious consideration before moving forward.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.