Once you get immersed in debt, you feel like you can’t get out of it. You will be spending a great amount of your salary on paying off debts. If you feel that you are drowning in debt and finding it impossible to recover from it, there are debt consolidation strategies that you can use. However, before you apply any of these strategies, you must first calculate how much debt you have.
Debt Snowball
This is one of the most effective debt consolidation strategies if you have small debt loads. If your debts amount to 36% of your gross income, then you should try this strategy. You don’t need any third party’s help to apply for this debt consolidation strategy. Here, you first pay off your smallest balance, and keep paying the minimum amount on the other debt accounts. Once the smallest debt is paid off, focus on the next smallest debt account. Now, add the amount you used to pay on the paid-off debt account to the current debt account you are focusing on. This way, each of your debt accounts will be wiped out from the smallest to the largest. The strategy is called ‘debt snowball’ as the amount you are paying for a debt account increases like a snowball.
Debt Avalanche
This is also a way of paying off small debt amounts. In this case, you first pay off the debt that has the highest interest rate, and pay the minimum amount in the other debt accounts so that you don’t get penalized. Once the account with the highest interest rate is paid off, move to the next highest rate. This strategy will help you to save money in the long run. You might take a long time to pay off the first debt, but the subsequent ones will be quicker. It is important to list your debts from the highest interest rate to the lowest so that you don’t miss any.
Consolidate High-Interest Debts
If you are finding it difficult to pay off your high-interest debts, like credit card payments, then you can try this debt consolidation strategy. Here, you put together all your debts into one monthly payment. This way, your chance of missing any debt payment will be low, and you won’t incur any extra fees for missing payments. You need to pay a fixed interest over a specific repayment term. Usually, the interest rate ranges from 7% to 36% for up to 7 years. The good thing about a debt consolidation loan is that you don’t need a good credit score to have it. However, with a poor credit score, you won’t qualify for a low interest rate. You can get a debt consolidation loan from your credit union or bank.
Balance Transfer Cards
These are credit cards into which you transfer your present credit card balances. They usually have a promotional period of 15 to 21 days of 0% interest. You will need a credit score of 600 or more to get qualified for a balance transfer card. Therefore, try to pay the minimum debt amounts on all your debt accounts to maintain a good credit score, so that you can apply for a balance transfer card.
Debt Management Plans
There are a variety of debt relief programs that nonprofit credit counseling agencies offer. These are similar to debt consolidation loans. Your debts will be put into one payment, and the interest rate will be low. The difference is that there is a small startup fee and monthly fees. Also, you won’t need a credit score to apply for debt management plans.
Debt Settlement
You can negotiate with the creditors to lower your debt. For this, you can consult a debt settlement company. As debt lowers your credit score, your aim would be to reduce your debt as quickly as possible. If you can settle your debt at a low amount with the creditors, then you can pay off the rest of the debt within a short time.
Refinance Mortgage
You can refinance your home and think of it as a new mortgage. Consolidate your other high-interest debt into your new mortgage, as this mortgage will have a lower interest rate and better loan terms compared to your other debt accounts. So, you will be paying less money to pay off debt every month. The prerequisite for applying for a mortgage refinancing is quite strict; you will need a credit score of 620 or more. You also must have home equity from 10% to 20% and a regular flow of income. The cost of refinancing is also quite high, about 3% to 6% of the outstanding principal amount.
Bankruptcy
This should be your last resort if you are unable to repay your debt by any other means. When you declare yourself bankrupt, the court will delete most of your unsecured debts according to Chapter 7 or place your debt amount in a repayment plan of 3 to 5 years approved by the court according to Chapter 13. However, bankruptcy will lower your credit score, and it will be very difficult to improve it.
Whatever debt consolidation strategies you choose, nothing will work unless you adopt some lifestyle changes. You must create a budget every month and stick to it. The 50/30/20 rule of budget is highly recommended, where you use 50% of your income your needs, 30% for all your wants, and 20% for paying off debts and small savings. You can use different budget apps to create a monthly budget. Next, you must find ways to reduce your monthly bills. You can reduce your subscriptions, cell phone bill, and others. Conduct some research to get cheaper car insurance or cable service.
Think of increasing your income by starting a second job or a side business. You can start freelancing or sell your used items. Stop using credit cards and don’t apply for further loans. Create emergency funds to manage your finances in difficult times without applying for a loan.
Final Words
When repaying debts, try to pay more than the minimum always; else, you will never be able to get out of debt. The majority of the minimum payment goes into paying the interest fees. So, your original loan amount doesn’t reduce. You can talk to your credit counselor to decide on debt consolidation strategies to help you get out of debt and build a better financial future.
