Multiple debt repayment alerts popping up at different times can be overwhelming and palpitating at the same time. This is true especially when you don’t know the surefire ways to make successful debt consolidation.
Debt consolidation is a great way to simplify your debt repayment process by combining multiple debts into a single loan. With it, you can reduce your monthly debt payments, lower your interest rates, and ultimately get out of debt faster.
This article discusses five must-follow ways to achieve successful debt consolidation and improve your credit score.
Why You Should Consolidate Your Debt
Debt is a huge burden that, when cleared, comes with numerous benefits and peace of mind. However, it’s difficult to clear your debt if you have multiple debts across various platforms and a single source of income that is not enough to cover all your monthly debt payments. That’s why it’s essential to consider consolidating your debt.
Here are the major reasons people consolidate their debt:
Lower Interest Rates
Having multiple debts from different sources means you’d pay interest on each of them. This compounds your interests and makes you spend more in the long run.
However, consolidating multiple debts into a single loan can often result in a lower interest rate, which can save you money in the long run. For instance, if you have two credit cards with interest rates of 18% each, you can get a debt consolidation loan with an interest rate of 24% to offset the debt. This leaves you paying lower interest than you did with your two credit cards.
Simplified Payments
Consolidating your debt can make your monthly payments easier to manage. This is because, instead of having multiple payments and due dates to keep track of, you will have only one payment to make each month.
Improved Credit Score
If you successfully consolidate your high-interest credit card debts into a lower-interest loan, it becomes easier to pay off your debt faster. This reduces your debt-to-income ratio and, ultimately, improves your credit score.
Reduced Stress
Carrying a lot of debt can be stressful, and consolidating them into one debt can help alleviate that stress. That means, instead of worrying about multiple debts and how to manage them all, you will have a single loan to focus on.
5 Ways to Successful Debt Consolidation
1. Create a Budget and Stick to It
It’s important to start by creating a budget that includes all your monthly income and expenses. You can’t successfully consolidate your debt if you don’t know how much income you’re getting on a monthly basis and how much you spend on other things outside debt repayment.
By creating a budget, you will understand your cash flow and identify areas where you can cut back on expenses. Cutting out some expenses will free up more money that you can channel toward repaying your debt.
Make it a priority to allocate a portion of your monthly budget toward paying off your debt.
Read: The Pros and Cons of a Home Equity Line of Credit (HELOC)
2. Choose the Right Consolidation Method
There are different methods of debt consolidation, including balance transfer credit cards, personal loans, debt consolidation loans, peer-to-peer loans, and home equity loans.
You can source your debt consolidation funds from a financial institution that offers you lower interest rates and a longer repayment period, or you can get them from family and friends who might not demand any interest. On the other hand, your home can serve as a means to get the best loan offers to sort out your debts.
Studying them all to understand the one that best suits your situation is critical to successfully consolidating your debt.
3. Shop Around for the Best Rates
If you’re getting a loan from a financial institution to consolidate your debt, it’s best to shop around and compare rates from different lenders before settling on one.
Many lenders will offer you loans with high interest rates, especially if your credit score is low. However, if you shop around, you will find lenders willing to offer you loans with lower interest rates.
Some lenders may also offer you lower interest rates, but with unfriendly terms and conditions in the loan offer. It’s always great to look at the terms and conditions on a loan offer before accepting it. If it contains other fees that might be unfavorable to you or contains short repayment periods, you should know to ditch the offer for a more transparent one.
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4. Avoid Taking on New Debt
While you’re consolidating your debt, there will always be that urge to get new debt. This is normal, especially when you channel all your income into repaying your debt. However, this will only increase your debt burden and make it harder to get out of debt.
At this point, it’s important to avoid every form of new debt you might incur and focus on repaying your debt completely. This is where budgeting comes fully into play. Before you buy anything, you have to ensure you have a need for it and that you can’t do without it at that time. If you don’t need it, or maybe you can postpone the purchase until later, then it’s best to leave it and spend the money on more essential things.
5. Stay Committed to Your Repayment Plan
One of the key ways to make a successful debt consolidation is to stay committed to your repayment plan. This is because regularly missing out on your debt repayments will greatly affect your credit score and affect your future access to credit.
Therefore, it’s important to make your payments on time each month and avoid missing any payments. You can set up automatic payments through your bank to ensure you don’t miss any payments.
Wrapping it Up
Paying off debt successfully can be a huge challenge if you don’t know how to go about it. However, if you stick to the five surefire ways in this article, you will successfully consolidate your debt and enjoy an easier, debt-free life in the long run.
