Most Americans have more than one credit card as well as loans and other bills. Remembering due dates for each can be a hassle. If paying off your various debts is becoming too much to handle you may be considering consolidating the payments into one larger payment with a lower interest rate in order to save money and pay down your debt faster. It sounds like the perfect solution but there are some things to know before you consider debt consolidation.
If you’ve decided that you are ready to get serious about getting rid of your debt spend some time weighing the following information before making your decision.
- If you own your own home you may make the choice to take out a home equity loan to consolidate your debt. This can be a somewhat simply way to get the money quickly but consider very carefully whether you will be able to make the repayments. It is not worth gambling with your residence if you aren’t 100 percent sure you can repay the loan on time.
- If you do not own your home, or have decided not to risk it for the loan you can go to your bank and ask for an unsecured debt consolidation loan. These loans can be more expensive to pay back than home equity loans and will usually loan you less money. If you have applied for an unsecured debt consolidation loan and did not qualify for the amount you owe it is in your best interest to seek the council of a credit card debt advisor. They can give you better information about the options open to you and help you avoid getting into a situation that is worse than the original debt.
- Look into credit card balance transfers. Transferring your balance to a lower interest credit card but before you do make sure you have a plan to not use the new card to run your debt up higher than before. Have a friend keep it at their house, freeze it in a block of ice, or cut it up the day you receive it without ever signing the back. Try not to look at it as a new credit card but as a small reminder of the loan you need to pay.
Know Where You Stand
- Before you consider debt consolidation loans or credit card balance transfers it is important to know what your credit rating is. If your credit score is low your loan costs will be high and you may not qualify to get a new, lower interest rate card. By obtaining your credit scores you can better know what to expect from negotiations.
- Understand your spending patterns and consider whether you are ready to alter them dramatically to keep to new, stricter limits.
Debt Consolidation-The Good
- Having a single payment per month can take some of the pressure off. You don’t have to remember the dates and amounts for a number of different bills, not to mention if you pay your bills online remembering user names and passwords for every different company. Having a single payment is emotionally freeing, you won’t always be worrying about when the next bill is due, you make one payment a month and feel the accomplishment of knowing you are set until the following month.
- You could save a significant amount of money by getting a lower interest loan. Not only does lowering the interest mean the possibility of a lower payment, it means that more of what you pay goes to your principle balance.
Debt Consolidation – The Bad
- When you consolidate your debt the amount you owe stays the same. Because you are only making one payment for the whole lump sum it could take longer to pay off the entire debt. Speak to whoever is brokering the consolidation to ensure that you can pay off the loan early without a penalty if the terms of the loan make the repayment period longer.
- Before you consider debt consolidation make sure you are ready to get organized and get real. Discretionary spending will have to be kept to a minimum in order to stay on top of the large consolidated payment. Make a budget, try to find out if you can pick the date you pay your lump sum payment. Set your payment date on a pay day so you won’t be tempted to spend the money before you make your payment.
If you do your homework before you consider debt consolidation you can make an informed decision about whether this is the right method of reducing debt for you. Spend some time working out a budget and finding out your credit score and then be honest with yourself about whether you are ready to face the discipline required to take the bull by the horns and work your way to a debt free life.