When many hear of the phrase ‘debt consolidation’, it immediately causes eyebrow raises, followed by a slew of questions:
- Why would I need to do that?
- How does it benefit me in the end?
- Where do I even get started?
- What companies are actually going to work with me to consolidate my debt?
These are all valid! Simply put, debt consolidation is available for anyone that may be overwhelmed by the number of creditors they owe. Maybe your situation is a little different– you have a limited amount of creditors, but the interest rates are through the roof causing the principal balance to remain at a standstill. Instead of paying multiple lenders month over month, you commit to one holistic and refinanced balance that is applied to all credit accounts at the time of consolidation. If this is something that piques your interest, take the following steps to make sure you and your finances are in the best shape possible to fully reap the benefits before making a final decision.
Thoroughly Examine Your Credit Report
This is one of the most important pieces– understanding your credit score! While it’s an absolute must to know what your credit score is, you must also know the data behind it. Use one of the credit agencies of your choosing, such as Turbo, to get your free, annual credit report. Make sure you thoroughly comb through all of the details and verify its accuracy. Before you attempt to consolidate any debt, it’s essential you are made aware of anything that may slow down or hinder this process. In the instance something is incorrect, dispute any errors online or via postal mail. Prior to moving forward with any debt consolidation, resolve the issues that may have arose to be certain you’re presented with the best solutions.
Research All Your Options
The grueling part that many overlook is doing the actual research. However, this is an important step that you should never skip because you want to ensure you’re knowledgeable before making any long-term decisions. Since everyone’s situation is unique, it’s best to consider factors such as your finances, lifestyle and your family. For example, if you have multiple credit cards with high-interest rates, it might not be the best idea to transfer these balances to a debt consolidation credit card. Depending on the shape of your credit, you can qualify for 0% APR for a designated amount of time– typically about 12 to 18 months. However, if this is something you’ve done in the past with little to no progress, you’d want to avoid ending up in the same cycle.
Let’s switch gears. If you are looking to consolidate your debt by using a personal loan, it’s vital to double-check the credit requirements from all possible lenders. There’s also another option, such as using a debt consolidation company to assist you through the process. Ask all the questions you need to achieve a personal level of comfort before making a decision. There may be some fees for the utilization of their help and expertise, so be sure to account for all these variables.
It’s Homework Time, Do The Math
I bet you thought you left the old pencil and paper method in grade school– not quite! No matter your preference for doing calculations, it’s imperative you complete the math for your personal circumstances. To aid in this exercise, there are online tools to help you determine if debt consolidation is the right way to go. You’ll need to know vital information such as, but not limited to:
- Interest rates
- Loan term
- Loan type
- Initial setup fees (if applicable)
Explore various banks, credit unions, and other lenders to gain comfort with the terms of their agreement. The last thing you want to do is sign the dotted line without being fully confident in your decision.
Take A Deep Dive of Your Personal Finances
We haven’t left the homework stage just yet. Since we’ve taken the time to do the research on potential lenders, it’s your turn for the spotlight. As biased as this may feel, it’s time to be honest with yourself about your own spending habits. The best way to start this is to review your bank and credit card statements from the last year. Do you spend a lot of money on entertainment? Are your living expenses more than what you’d like them to be? In order for debt consolidation of any form to be a viable and successful solution, you have to evaluate how you handle money when no one is watching. If this exercise makes you justify all of your purchases no matter what, call in some reinforcements. Pull in someone you can trust to take a look at your overall spending habits. More times than not, it doesn’t take much to recognize a pattern. If you spend more money during the summer, that’s something you can easily pinpoint. If the holiday season causes the cash to fly out of the window, that’s also something easily identifiable. While these things aren’t wrong in nature, you must account for seasonality in your new budget.
Create and Stick To A Debt Management Plan
The idea is to take steps toward financial freedom. Debt consolidation shouldn’t replace the initiative of taking responsibility for your finances. Since you’re already in the mode of learning, this is a great time to re-evaluate all expenses and create (or adjust) an already implemented budget. Apps like Mint can help you effortlessly manage your finances all in one place. When you’re setting up your budget, whether on the app or the classic pen and paper, ask yourself these questions: what spending habits need to change? What works well for you? What area(s) can you be more disciplined in? If these questions cause you to draw major blanks, seek the help of a professional to assist in the process of unpacking these necessary questions.
Commit to Financial Wellness and Stay The Course
This is indeed a long game! Just like how your debt wasn’t accumulated overnight despite what it may feel like, paying it off won’t be a walk in the park either. If and when you feel discouraged, remember that the purpose of consolidation is to minimize the stress associated with multiple lenders and varying interest rates. Taking charge of your financial freedom is the first step, following through is what guarantees it.