If you are feeling the punch of increased household costs and debt pressures, then you are not alone. Many people today are struggling to make ends meet and drowning in credit card debt. One of the ways to get out of this financial trouble is to consider debt consolidation, which combines multiple debts into a single loan. A bank disburses a lump sum amount to pay off all your credit card balances and high-interest loans. As a result, you will have to pay only one monthly payment instead of many. It is possible to reduce credit card interest by 50%. Here is the debt consolidation checklist that you must know.
Debt Consolidation Checklist
Before you think of consolidating your debts, acknowledge your financial problem. You must confront your previous bad decisions about money. You should realize that its time to do something about it before things get out of hand. Debt consolidation is a way to get out of financial trouble. Follow the debt consolidation checklist mentioned here.
➡️ Decide Whether Debt Consolidation Is The Right Option
Debt consolidation is not always the best option for anyone failing to pay loan interests. You have multiple high-interest debts that will take several years to pay off, so you should think of debt consolidation. However, you need to promise that you will manage your finances well so that you don’t fall into the same situation in the future.
➡️ Make a List Of All The Debts
It is a very important step of the debt consolidation checklist. You must make a list of all your debts and include details like minimum monthly payment, interest rate, due date, and total balance that is owed. You can pull out your credit report for this purpose. Looking at your list, you can figure out which debts to focus on first. You can get the help of a financial advisor to help you with this.
➡️ Try To Reduce Credit Card Rates
Not too many people are aware that it is possible to lower credit card rates. You should check out with your credit card companies from time to time to see if they can lower your rates. If you repay your minimum payment regularly, then these companies can grant your request of rate reduction.
Your goal is to pay less than what you did; therefore, the interest rate must be lower than before. Normally, a bank gives you a lower interest rate on a loan when your credit score is high or when you apply for a secured loan that requires collateral.
To improve your credit score, you should request a copy of your credit report online and check for any invalid or missed information. You can call the credit reporting agency to correct any mistakes. You should also try to improve your credit score by paying bills and interest on time. You get an extended repayment term when you consolidate your debts into a new loan. So, it is possible that you may repay early and save a lot of money in the long run on interest charges.
➡️ Make a Budget
Before applying for debt consolidation, you must calculate your monthly budget. By knowing how much money you have left after paying off all your monthly bills, you will know whether you can pay the installments for your new loan. You can use the 50/30/20 rule in creating the budget, where you will allocate 50% of your net income on essentials like food, housing, utility bills, and minimum interest payment. 30% of your income should include restaurant bills, streaming subscriptions, or other entertainment. The rest 20% money should be your savings, which you can later use to pay off debt. There are different apps available today to help you create a monthly budget.
➡️ Explore Debt Consolidation Loan Options
You can choose from various loan options. Taking a home equity loan against your home is an option if you are looking for lower interest rates. With a lump sum payout loan, you will get to pay low monthly payments that will be extended over a long period. However, you must know that you may incur additional fees and may lose your home in case you default on payment. You can also consider a home equity line of credit that works like a credit card.
You can take a personal loan for debt consolidation. Lenders may not ask for collateral, so it’s easy to get. However, your interest rate will be higher than that of other types of loans, like home equity loans that require collateral. The interest rate of personal loans is determined by the credit scores, debt-to-income ratio, and repayment history.
Another option is to apply for a new credit card. The credit cards issued by local credit unions offer lower interest rates and fees than those offered by banks. So, by taking the new credit card, which is the balance transfer card for debt consolidation, you can lower your monthly interest payments. Some cards offer 9% or lower APR for the first one or two years. However, they also charge a balance transfer fee. You will also experience a temporary drop in your credit score. Therefore, you need to weigh the pros and cons of different types of loans. You must remember that a balance transfer credit card is the best option for someone with a high credit score.
You can go to debt consolidation programs to help you reduce interest rates. You will better understand your money management through these programs. They can help you choose the right plan for debt consolidation.
➡️ 401(k) Loan
If you have a 401(k) loan, that is the retirement plan sponsored by your employer, then you can take a loan against it. You can take either 50% of your account balance or $50,000, whichever amount is less. You will have to pay lower interest rates, and the repayment period will be five years. No credit report checking is required here, so it won’t hurt your credit score.
➡️ Check Out Eligibility For Debt Consolidation
You must show the lender that you have a stable income to repay the debt. Your debt-to-income ratio should be below 35% of your monthly income. If you are thinking of securing low-interest loans, then you should have collateral or a high credit score.
➡️ Improving Chances Of Loan Approval
Make sure you have all the necessary documents ready to support your loan application. These include financial statements, proof of employment, identification, tax returns, and others. Check your credit card report for any errors. Review your budget to see how you can allocate more funds for paying off debt.
Strategies For Debt Management
You can use accounting software to keep track of your debts with reminders for payment dates to avoid extra fees. To avoid late payment, you can set up direct debit or auto pay of loan interests from your account. You should maintain a spreadsheet for your monthly budget to find out where you can cut expenses to have more money available for paying off debts. It is a good practice to keep regular communications with the creditors to find opportunities for reducing the interest rate and getting better terms.
Conclusion
You must develop a responsible money management habit. You should stick to a budget so that you don’t overspend. You can speak to a debt consolidation expert to select the best debt consolidation strategy. Once you are in a debt consolidation program, you must stay disciplined by paying on time and avoiding penalties. You can look for ways to boost your income so that you can pay off your debts earlier.
