According to financial experts, paying off debt requires a well-thought-out strategy. Debt consolidation1 is a typical approach that includes consolidating various debts into a single loan or credit card, resulting in a single low, easy-to-manage monthly payment. Because it feels manageable, consolidating debt into one place can be beneficial.
Debt consolidation is a blanket term that refers to various approaches that allow you to reduce your debt obligations. The most common approach is debt consolidation loans2, which entail taking out a new loan and using it to pay off all your existing debts. This can also be referred to as debt settlement because you essentially settle your debt by paying less than what is owed.
Here are four steps to successful debt consolidation.
Know your Debt Information
Make a thorough inventory of all your present bills. Here are some common types of debt: credit cards, student loans, medical bills, auto loans, and mortgages. As you assess your debt consolidation options, be sure to consider all your various obligations. The goal is to pay off any lingering debts as quickly as possible—not create new ones!
Keep in mind that not all debts are eligible for consolidation. Mortgages, for example, are not included in your debt burden when consolidating. How much you owe, interest rates, due dates, and credit conditions are all critical pieces of information to have.
Examine your Credit Score
Before you jump in, check your credit score to make sure it’s good enough to secure a loan. If you have excellent credit, lenders will find it easy to approve. In turn, your interest rate will be lower3 than if you had poor credit. If your score is below average, work on improving it before applying for a loan because lenders are more likely to give high-interest rates to borrowers with poor credit.
Your credit score is based on many factors4, including outstanding debt and how frequently you pay it off. Maintaining low balances and consistently paying bills on time are two of the easiest ways to improve your credit score over time.
Contacting one of three major credit bureaus (Experian5, Equifax6, or TransUnion7) will give you a free copy of your credit report and score.
Once your credit is ready, start by contacting local banks and asking them if they offer debt consolidation services.
Examine your Choices
Don’t register with the first business you come across. When you consolidate debt, you essentially take all your existing debts and combine them into one manageable monthly payment. While it can help to simplify your financial life, there are fees associated with debt consolidation that you should be aware of before making a decision.
Investigate your alternatives to see which financial organization can provide you with the greatest interest rate and loan conditions. Some lenders are more stringent than others when it comes to debt consolidation, so it’s important to know what you’re getting into and how much you stand to gain from your loan. Many lenders advertise lower interest rates and monthly payments but dig a little deeper and you may find these offers aren’t as great as they appear.
Begin by looking at your bank, then their rivals, and credit unions.
Get Rid of Temptation and Enlist the Help of a Friend
Remove any credit cards and anything else that can entice you to spend more than you can afford. If poor financial practices persist, you may find yourself in an even worse scenario than before, with one large debt and new debt obligations on top of it. Ask for help from your family members and friends.
When considering how to consolidate debt, one should evaluate all of their options by calculating their monthly savings against any additional costs they would incur. To begin, identify how much money can be realistically paid towards each account on an ongoing basis; even if these figures seem small, they need to add up to more than what you are spending currently per month on all accounts combined.
Consolidating your debts isn’t simply about saving money by just having to pay once a month. It provides you with the opportunity to pay off your entire loan at a lesser interest rate. That means you can pay more than the minimum monthly payment and pay off your debt faster, allowing you to achieve your ultimate goal of being debt-free.