Debt consolidation is a great tool for helping those drowning in debt to pay off their debts and eventually gain debt freedom. However, going blindly into a debt consolidation agreement is not a good idea. You are likely to make mistakes if you don’t weigh up all factors, and some of these mistakes can even land you in more debt. In this article, we discuss some tips and debt consolidation advice from experts in the industry.
As mentioned above, debt consolidation is just a temporary solution to a bigger problem. Even after you consolidate your existing debts, you need to acknowledge and work on changing the behaviors that landed you in debt.
Kathryn Bossler, a financial counselor at Green Path Debt Solutions, says that debtors turn to debt consolidation as a knee-jerk reaction to drowning in debt. But they fail to consider and address the problems that landed them in debt. Changing spending habits is also about making sacrifices. The best candidates for debt consolidation are those who commit to cut their past spending habits. As such, resolve to:
There are several ways to consolidate debt:
Understanding all these options is important. Find out about all applicable fees and how long you will enjoy low interest rates. Credit card transfers, for instance, charge up to 5% transfer fees and may only offer low interest as a promotion. Double digit interest rates tend to apply after the promotion; if your debt will take longer than this to repay, a transfer card may not be a good option.
Most importantly, before you leverage your home equity, ensure you are comfortable with the repercussions of defaulting on payments.
Mathew Isaac, associate professor at Seattle University, advises that for a debt consolidation plan to succeed, you should have a “clear plan of attack”. This means creating a budget that doesn’t put too many constraints on you in the present, causing you to crave things and splurge in the future.
Instead of cutting out essential items from your budget, focus on saving more money by reducing the number of holidays you take or the amount you spend on eating out. For instance, if you routinely spend $5 on a cup of coffee every weekday morning, carrying your own coffee from home will free $110 from your budget. You can redirect this money to debt repayment.
When trying to repay credit card debt, you should stop all spending while in the middle of a consolidation plan. Some people resort to techniques such as cutting up their cards or locking them away to reduce the temptation of spending. Rebecca Rouse, director of IPA’s Financial Inclusion Program, says such “commitment devices” can help to achieve debt freedom. Rouse also advises that it’s a good idea to:
Even if you lock your cards away, do not close your accounts, as doing so will lower your credit rating.
It’s normal to feel disappointed in yourself and even ashamed for being in debt. But such feelings will only limit you from seeking help from experts and peers. Online forums and support groups are full of insights and lessons from members who are struggling with debt or who have repaid their debts in full. Such forums can help you get some perspective and keep you on track.
Furthermore, getting debt consolidation advice from a counsellor is an important part of any debt repayment effort. Credit counselling will help you to identify negative trends in your past spending habits. If for instance you are spending too much money on entertainment or living expenses, a credit counsellor can help you to identify ways to downgrade.
When paying multiple debts, debt consolidation will ease this burden by conveniently rolling them into one lump sum. However, as much as convenience is important, there are times when consolidating debts, especially low interest loans and credit cards, may not be worth it. Before you decide which loans to consolidate, find out if it all makes sense from an interest point of view.
If you have a low balance on some debts, consider making a lump sum payment to clear them. As mentioned above, even cutting a daily cup of coffee can free up to $110 from your monthly income.
Once you decide that debt consolidation is the best way forward, do your research until you find the highest rated debt consolidation company. Before you sign up for a plan, consider the following: