3 Ways To Successful Debt ConsolidationWritten by Carly Simon-Gersuk
One common strategy to pay off debt is debt consolidation, which involves combining multiple debts from credit cards, loans, and other bills into one monthly payment. While debt consolidation is not a solution for everyone, for many it may lower interest rates resulting in saving money, paying lower monthly payments, and paying down faster.
Consolidation works well for high-interest debts, such as credit cards. At the end of Q2 this year, 2020, The Federal Reserve Bank of New York released a report indicating that the average household credit card debt was $7,938 (1). While this debt average has decreased over the past year, it still is costing over $1,000 in interest. With the amount of interest paid adding up over the years, consolidating is a great way to invest in your savings and manage your money easier.
With the proper research and guidance, consolidation can save you time and money. So if you check the boxes to being the ideal person to manage debt through consolidation - someone with a fair amount of high-interest credit card debt who has a good credit score and financial discipline - here are 3 ways to make debt consolidation work for you.
1.Decide on what type of debt consolidation works best for you
A debt consolidation from a financial institution is not necessarily the only option. It is important to research what type of consolidation works best for your situation. Some of the main ways to consider are:
- Debt consolidation loans - These are installment loans offered by financial institutions that usually over lower interest rates over a longer repayment period. Depending on the financial institution this could mean paying more or less interest over time.
- Balance transfer credit cards - This involves transferring your credit card(s) balances from a higher-interest card to a card with a 0% introductory rate. It is important to pay attention to when the introductory period expires. This option only makes sense if you can pay off most, if not all, your debt before that period ends.
- Home equity loan or auto loans - These are secured loans borrowed against the equity you have on your home or car. These loans tend to have lower interest rates and easier to get, but they come with a big risk if you default on the loan.
- Personal loan or borrowing from friends and family - The quickest option to paying off your debt may be to get a loan from a lender or family/friend. With a good credit score you are more likely to get approved for a loan from a lender, and even if it is so, you may choose to borrow the money from a family member or friend. If you go that route, make sure to get everything in writing and come to common terms. This will protect both of you, as well as your relationship.
2.Make a realistic budget
While we have discussed in previous blogs budgeting, for consolidation a budget will be crucial for your success. A basic budget will allocate money for bills (such as rent and utilities), emergency funds, and savings. A realistic budget will allocate for all those expenses but also considers infrequent expenses, such as car registration and holiday gifts or travel.
“People will go on a spending ‘diet’ and then feel like they’ve restrained themselves for so long that they go out and splurge,” says Lara Lamb, a certified financial planner at California firm Abacus Wealth Partner. (2) “A realistic budget gives you enough to spend on things you value and you love.” We all like to have fun, so make sure to leave room for it! Whether it is monthly or annually, be realistic in what you would like to spend on yourself.
Another great tool for planning and sticking to your budget is to work with a financial counselor. Depending on the financial institution you may work with, utilize their programs and assistance they offer to best help you pay off your debt.
3.Stop using your cards
While it may seem obvious, stop using your credit card(s) and accruing more debt! Stay focused and committed on elimination. Be smart about your spendings so you can pay your monthly payments on time, and while you do not have to physically lock away or destroy your credit card, only use your card in an emergency.
As a long-term goal to remain debt free, once you have cleared your debt do not go back to over spending. Use this reset to use your credit card on items you know you can pay off at the end of the month, or in an emergency knowing you can pay off in a few months. This is where your budget comes back into the picture. Being debt free does not mean you no longer have to follow your budget. In fact, to remain debt free utilize your realistic budget and make adjustments where they may seem fit.
Written by Carly Simon-Gersuk