Consolidating Debt

Do you have a lot of debt and can’t seem to get your arms around it? Do your bills seem to pile up no matter what you do? If you learn how to properly consolidate your debt, your financial issues will become more manageable. You should consider the following:

  1. Reduce the amount you are paying in interest each month where possible.
  2. Reduce the amount of monthly payments for loans and other expenses.
  3. Reduce future spending by using a well-organized financial plan.

Reduce Your Interest

The key to reducing your interest is to either consolidate your loans or refinancing where you can to obtain a lower rate on your loans. How do you do that?

Transfer your balances to one card. If you have more than one credit card, consider transferring your balances to the card with the lowest APR. Then, close your other cards and cut them up. That way, you are focused on only one card and one payment. You can only use up to that credit limit as well. This may negatively affect your credit score.

Pay off your lowest balance. If you cannot transfer all of the balances to one credit card, you should pay off the lowest balance as soon as you can. Pay more than the minimum payment for that balance and pay the minimum balance on the other cards. Once you have paid off the smallest balance, move to the next smallest balance. Again, the key here is to limit your spending once you pay off these cards…or close them and cut them up.

Transfer balances to consolidation loan. Consider transferring your credit card debt to a lower interest debt consolidation loan. When you have a lower interest rate, you will naturally pay less in interest.

Use a home equity loan or line of credit. If you have equity in your home, consider transferring your personal debt to a home equity line of credit or home equity loan. In most instances, this will not only lower the interest on your loan amount, but you may be able to write off the interest from this loan (see your tax advisor for more information). However, you must recognize that if you take this route, you are now putting your home up for collateral on the debt that you owe, and you may put yourself into deeper debt if you do not eliminate (or limit) your credit cards or other personal loans.

Refinance your mortgage loan. Refinance your mortgage loan or home equity line/loan, if possible. You may be able to get a lower rate or get into a fixed rate loan that you couldn’t before. Be cautious of prepayment penalties or other fees; make sure that it is worth your while to refinance.

Borrow from a family member. If you can, borrow money from a family member to pay off the loan and work out a lower monthly amount to pay him/her back over time. In most instances, you will not pay interest and will be able to pay the debt off faster.


Reduce Monthly Loan Payments and Other Expenses

When you want to consolidate your debt, you need to take a look at all of the expenses you are making on a monthly basis. What loan payments are you making? Are you paying off interest only, or are you touching the principal of your loan? Here are some tips to think about in this area:

  • You should always try to pay more than the minimum payment amount on your loans so you can pay off your loan faster. If you have no debt, you will definitely lower your monthly payments.
  • Analyze what you are spending your money on monthly. Where can you cut expenses? When you can cut expenses, you can use that money to pay off your debt faster and save money in the long run. You may have to cut out fast food or extra trips to the store. You may need to start cutting coupons or shopping at discount stores. It is worth it to live a little leaner in order to save your credit rating.

Create a Feasible Future Plan

Once you make changes to your lifestyle, you must ask yourself if you can sustain this type of living. Can you NOT spend on your credit cards? Can you avoid spending money on things that are not WANTS instead of NEEDS? Can you stay on course for your future? It is critical that once you cut up your credit cards, or pay off other debt, that you don’t take the extra money and spend on something that may put you in greater debt. If you need help with setting up an appropriate spending plan or debt consolidation plan, you should talk with a financial advisor.

Click here to complete a learning activity called NEEDS vs. WANTS

How did you do?

Distinguishing between NEEDS and WANTS can be difficult especially when you have the ability to put whatever you want on a credit card and “pay for it later.” Keeping yourself out of debt means that you only purchase those things you can pay for with cash, or if you use a credit card, you can pay off the balance each month.

Whatever you decide to do, getting out of debt gives you freedom. You will be able to enjoy life more fully because you will not have to worry about where you are going to get the money to pay off the debt you have. The most important thing you can do to eliminate debt is to do something. Don’t be overwhelmed and just leave it…do something today.


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