Over time, carrying around a high debt load can become a burden that can stand in the way of building your credit score.
Thankfully you can use debt consolidation to improve your standing.
What is debt consolidation?
When you have multiple old debts, you can consolidate all of these notes into a single new one. There are several options to choose from, including a personal loan, a credit card balance transfer, a line of credit or a home equity loan, among others.
Consolidation can be the best option if you have a significant amount of high-interest debt, typically from credit cards. This works because the new consolidated loan will ideally have a lower interest rate than the existing debts. A drop in the amount of interest you pay shortens your payoff period and makes your payments more manageable.
If you want to roll your old debt into a new, more manageable loan, consider these three top tips to optimize your debt consolidation:
1. Calculate your debt and finances
Before you get started on the debt consolidation process, you need to add up all your current debt – credit cards, past due bills, medical expenses, and any outstanding payments. Without this information in hand, it’ll be impossible to create a realistic payoff schedule.
Draft a list of all the debt you currently owe, including:
- Outstanding balance.
- Monthly payments.
- Interest rate.
- Due dates.
- Other fees and details as necessary.
Figuring out your debt situation and crafting a tight budget based on these numbers will help you realize which is the best path for consolidating it.
2. Compare debt consolidation options
Once you have a clear idea of how much debt you’re carrying, how much it’ll ultimately cost to pay it all off and how long it’ll take, you can compare your options for debt consolidation.
The top four methods for consolidating debt include:
- Balance transfer cards.
- Unsecured personal loan.
- Home equity line of credit.
- 401(k) loan.
Each of these have their pros and cons. For those individuals with an average credit score or higher, a personal loan might make the most sense. These come with a fixed interest rate and month payment, as well as a fixed payment period. Plus, with a personal loan, the higher your credit, the lower your interest rate on the loan.
3. Make and follow a strict budget
After you’ve made the move to consolidate your debt, it’s absolutely crucial that you create and stick to a manageable budget each month. If you go through all the trouble of rolling multiple debts into one new one with the hopes of eventually paying it down to zero, it won’t do you any good if you keep up with the same spending habits that got you into debt in the first place.
The best course of action involves drafting a highly detailed budget, not just a simple one of monthly payments. You’ll need to account for infrequent expenses, like car registration fees or expensive times of the year, such as holidays.
Avoid using a credit card at all costs, too. Some people make big grandiose gestures such as cutting up their credit cards. While you don’t have go to this extreme, it can be an effective move and help you achieve your long-term goals.
Although a high debt load might seem overwhelming and insurmountable, there are options available to help alleviate this burden.
Click here to contact an agent at First Centennial Mortgage to learn more about debt consolidation options.