Some Ways To Successfully Consolidate Your Debts!
Debt consolidation is a type of debt refinancing wherein multiple high-interest debts are combined into one loan with a lower interest rate. A single loan with a fixed monthly payment will allow you to pay off several debts. When a debt consolidation loan is managed responsibly, it can help you save money on interest and quickly get out of debt.
This type of loan means you borrow the amount you owe on your existing debts. Once the application for the loan is approved, the funds you receive will be used to pay off your loans. There are also cases where the funds are directly sent to the creditors. After which, you can start with the monthly payments on your new consolidation loan.
For consolidation to work well, one must:
- Plan an ideal budget.
A basic budget allows the allocation of money for debt payments, emergency funds, and contributions to retirement savings. However, this is not enough for consolidation. To be a successful budgeter, one must avoid adding debt by accounting for infrequent expenses like fees for car registration and leaving room for fun, like during the holidays when costs run high. A realistic budget allows you to have enough to spend on things you value and love.
- Abandon utilizing your cards.
You should not use your cards as you pay off your debt. It is a cardinal rule of consolidation. There are specific “commitment devices” that can be used to prevent one from using their cards, like writing down why you want to be debt-free and how often you will make payments and checking your progress by setting regular reminders. There are also methods like cutting it or freezing them in ice, which can be extreme but effective, especially in helping people achieve long-term goals.
Locking away your cards does not necessarily mean closing the accounts that can hurt your credit. A minimal charge on your card every few months can be an exception to the no-use rule. It allows you to pay them on time and in full, and at the same time, keep the account active and your credit intact.
- Differentiate various consolidation products.
Balance transfer cards allow you to transfer debts from other cards and, for a limited time, usually from 15 to 21 months, charge no interest, and after that time, a double-digit interest rate will take effect. After that, most cards charge balance transfer fees. Good credit scores and high incomes are required to qualify for a consolidation loan. That is why adding up and listing all your potential sources of income, including your money in the savings account on your application, will improve your chances of getting a consolidation loan.
Compared to credit cards, this type of loan commonly comes with lower interest rates and allows you to borrow more money. Your credit profile and amount of debt will determine the rates. A lender that directly sends the capital straight to your creditors can take away the temptation of spending the borrowed cash on other things instead of using it to pay off the debt.
- Recruit help for your goals.
Most people are ashamed when they have debts. However, having support from debt support groups, online forums, or close family members can be a powerful motivator to keep you on track to reach your goal and, at the same time, can hold people accountable.