Have you heard about debt consolidation but aren’t sure what it entails? The good news is it is simpler than you probably think, and for many consumers, it is a helpful way to streamline payments and work quickly toward debt freedom.
Debt consolidation is a common tactic consumers use to pay off outstanding debts and with a few exceptions, it’s an option that is readily available to most. In short, debt consolidation is a process that involves combining your high-interest debts into one single low-interest payment. Typically, instead of managing multiple payments to different creditors each month, you will pay off your creditors with the funds from the loan and then make a single payment toward your loan each month. When done well, this process can reduce your total debt and shorten your repayment timeframe.
There are two primary ways to consolidate your debt. Both require good credit in order to qualify:
– Seek a balance transfer credit card: This applies if you have a substantial amount of credit card debt. The process involves transferring all of your credit card debt onto a single card and paying the balance in full (if possible) during a 0% interest promotional period.
– Apply for a debt consolidation loan with a fixed interest rate: As described previously, this will involve using the money from your loan to pay off your debt, then paying it back in installments.
Here are a few steps you can take if you are interested in consolidating your debt:
Step 1: Set a feasible, but aggressive, budget
The first step in any financial plan is setting a realistic budget. This is especially important when you are in debt and actively working to pay it off, as every penny matters.
When setting your budget for a debt consolidation plan, the key is to figure out how much money you can dedicate to your debt payments each month. If possible, it is best to contribute more than the minimum payment amount. In determining how you can maximize your payments, consider how you can drum up the extra cash to pay down your debt faster. Are there areas of your budget that you can slash so that you can pour more into your payments? Is there a way to increase your income by asking for a raise or picking up a second job? Can you reduce your spending on discretionary items to free up budget space? Take a careful, honest inventory of your finances, and move on from there.
Step 2: Review your spending and saving habits
Debt consolidation can be a fantastic way to get out of debt, but unless you change your habits, you’re likely to fall right back into it. In order to identify patterns in your spending and saving habits, take a deep dive into your financial situation, evaluating your existing debts, your interest rates on each, and your monthly payment amounts. In doing so, pay particular attention to the largest amounts. How did you amass this debt? What exacerbating factors led them to be so large? For instance, if you consistently miss payments – or you make them late – that may be the reason why the bulk of what you owe is years of accumulated late fees. Or, if you frequently charge items to a high-interest credit card, you might have tremendous amounts of interest weighing you down.
Once you identify the factors that have contributed the most to your debt, devise a plan for how to address those – as well as what you can do to avoid falling into that same situation again.
Step 3: Figure out how much you can afford
If you want to use debt consolidation to become debt-free, you need a plan. Figure out how much you can afford to pay back each month on your loans. Keep in mind that exceeding the minimum required payments is the best debt relief option out there because it sets you up to beat the accumulation of interest over time. As such, make sure you pursue a plan that sets you up for success, with payment amounts that you can afford (or exceed).
If you cannot afford to make monthly payments, you may want to consider another debt relief option like debt settlement.
Step 4: Check your credit
Obtain a copy of your credit report and comb it carefully. Make sure you identify the debts that have most seriously impacted your score and give them priority when working through your debt consolidation plan. In other words, plan to tackle those first.
Having a grasp on your recent credit history will help you when it comes time to work with a professional. Let your credit counselor or debt relief agency see a copy of your report so that your representative can help you devise a plan that is best suited to helping you become financially independent sooner.
Step 5: Find a partner for your debt consolidation journey
Finally, seek someone to support you in your journey to financial freedom. Numerous agencies offer loans for debt consolidation, and many financial counselors are specifically focused on helping consumers navigate debt relief plans. Before choosing a group to help you, do your research and make sure you’ve selected a reputable, trustworthy company.
Paving your path to financial freedom
Although there is no quick and easy way to tackle a mountain of debt, taking small steps, like applying for a debt consolidation loan or setting a strict budget, can help. When working through your financial plan, remember to be patient and focus on the long term: With consistency and commitment, you will surely find debt freedom.
