Smart debt consolidation strategies are necessary for anyone struggling with multiple, high-interest debts or bills. Indeed, if your debts are piling out of control, consider combining them to ease your monthly financial obligations. Debt consolidation conveniently lumps all your debt obligations, lowers the overall interest payable, and simplifies your monthly payments. With the right approach, you swap high-interest debts for lower interest ones, distributed over an extended period.
Here are five smart debt consolidation tips you can use.
1. Know the Difference between Debt Settlement and Debt Consolidation
Like any other financial strategy, debt consolidation is not for everyone. Then, determine whether you need debt consolidation or a debt settlement plan. Debt settlement happens when your creditor accepts a lower repayment as a full settlement of your current debt. It appears in credit reports as “Paid Settled”, or “Settled”, and will affect your credit score in the long term. And, if you have a poor credit score, then debt consolidation is a more viable option.
How Debt Consolidation Works
Debt consolidation entails merging multiple loans into a single financial commitment. It shifts all your existing loans into a single, manageable debt. Hence, you take a new loan to pay off all previous debt obligations. Then you are left with only one loan, hence making a convenient single monthly payment.
Besides, borrowers with a good credit score can negotiate better terms for the new consolidated loan. Still, as per what Bills.com says about how to get a debt consolidation loan with bad credit, all hope is not lost if you have bad credit. By comparing multiple loan offers, you can save on interest rates and improve your credit rating.
Opt for debt consolidation if the new loan has an interest rate that is much lower than the cumulative interest from your existing debts. Also, try to avoid lenders that charge origination fees, as these additional charges may pile up in the long run.
2. Address the Underlying Cause
Next, analyze your spending to pinpoint where your money is going. For example, operating without a household budget makes you vulnerable to overspending or impulse buying using high-interest loans. And, a late repayment of loans attracts hefty penalties and fines. Then, come up with a balanced budget and take up one or two loans that will consolidate all your financial obligations into manageable monthly payments.
3. Pick Debts for Consolidation Wisely
Note that not all debts qualify for consolidation. Most unsecured loans like gas cards, pending medical bills, credit cards, and store cards are suitable for consolidation. However, you may have to deal with overdue utility bills for utilities that are yet to be terminated by the service provider separately from other debts.
Second, even though the debt consolidation strategy will result in fewer monthly repayments, this convenience may be at the expense of higher interest and fees distributed over a longer duration. Then, analyze the debt consolidation solution before agreeing to it. Then, only consolidate high-interest debts, and set up auto payments for the lower interest debts.
4. Keep off Credit Cards
After consolidating your debts, the financial relief can easily tempt you into acquiring more debt. Therefore, resolve not to charge any additional expenses to your credit cards until you settle your consolidated debts. Otherwise, a lack of financial discipline may sink deeper into debt, leading to bankruptcy or loss of property t debt collectors.
5. Create an Emergency Fund
Set aside an emergency fund. An emergency fund will be your fallback plan whenever you need to make unplanned spending and other emergency expenses. The fund will help you avoid high-interest credit card debts. Deposit the fund in a savings account. the fund should buffer you for at least three months. Then, top up the fund to cushion you for six months, then one year.
Smart debt consolidation tips are your gateway to financial freedom, especially when struggling with multiple high-interest debts. Investigate the cause of your current debt situation. Then, decide on which present debts to consolidate. Next, create an emergency fund that will shield you from the temptation of adding more debt while serving your consolidated loan. A typical consolidation loan may take 24 to 60 months; hence, financial discipline is necessary.