Top 10 Ways to Make Debt Consolidation Work for You
Debt Consolidation. These two words have become the catch-all for everything from signing on with a credit counseling agency or a debt settlement firm to creating do-it-yourself plans, where you get a lower interest rate on a bunch of your higher rate debts and only have to write one check per month.
Debt consolidation can be a great money saver and stress reducer. Handled correctly, it can vastly improve the quality of your life – both down the road and even while you are going through it. To up the odds that you’ll actually save money and have a positive experience, here’s what you need to know:
1. If the debt collectors are calling, you’re facing a financial crisis. Do-it-yourself debt consolidation alone won’t solve your problems. Start reading and get professional help now. Your credit score has no doubt suffered because of your financial problems, so don’t bother applying for those great low rates that are endlessly advertised.
Instead, treat yourself to a free, private debt consultation and let a Credit.com professional steer you to the expert help you need. For example, your best option might be to work with a non-profit credit-counseling agency , which can help you create and stick to a budget – as well as negotiate with your creditors on your behalf.
2. Feel like you’re making ends meet? Don’t let the lure of the low minimum payment keep you from considering debt consolidation. Even if you owe a lot at a high rate, if you’re managing to pay the required amounts, you may be tempted to leave well enough alone. Watch out! Aside from all the money it would cost you, someone’s going to get sick, fired, divorced, flooded, and burned out – you name it – while you read this. It could be you or someone you love!
Olivia and Oscar Overspender jointly owe $20,000 at 18% on the various pieces of plastic in their pockets. Since they can come up with the $400 they’re required to pay this month on their credit cards, as well as the amounts they owe on their other bills, the Overspenders are tempted to simply write the checks, and not invest the time and energy to consolidate their debts.
But if they only knew how much their complacency was costing them … and their kids … they might think differently. By only sending in the required minimums, it will cost the Overspenders $78,931 by the time they finally pay off these credit card bills – some 69 years from now. That’s almost four times what they owe … assuming they don’t charge another nickel on these cards! (And this figure doesn’t include anything they could have earned on that money if they had it working for them as an investment account.)
3. Don’t rush into anything. It’s great to explore true debt consolidation plans – where you get a lower interest rate and pay off your debts quickly. But just like there’s no benefit to the sort of complacency that Olivia and Oscar Overspender have, rushing into a debt consolidation scheme can be just as bad. Don’t give into the feeling, “I want a solution and I want it NOW!”
If you’re tempted to jump at the first, “We’ll cut your monthly payments in HALF” ad that you see, turn off the TV. And certainly don’t run to call the advertised 800 number.
Hold off a little while longer. It took you quite some time to rack up all those debts, didn’t it? Take the time to consider the pros and cons of the debt consolidation options you have available to you. You probably have more choices than you think. For example, you may be able to get:
Each of these options comes with its own pros and cons. Become familiar with them before you do anything. For more information, start here . What might work for Olivia and Oscar Overspender might not be best for you. By taking the time to make the right debt consolidation choice for your family, you’ll save money – and grief.
4. Be clear on your payoff goal. If you want debt consolidation to save you money, getting the lowest interest rate you can isn’t enough. Commit to paying your debts off as fast as you can – in 3 to 5 years – and in even less time if you can swing it.
Do you know how much to send in to pay off your debts in 3 to 5 years? If the Overspenders first reduce the interest rate on their $20,000 debt from 18% to 13%, how much it will cost them a month to pay it off in five years?
The correct answer is 1. $455. That’s not much more than they are sending in now. Take a look at the following “Pick a Monthly Payment” Chart to see how much you need to send in to reach your payoff goal.
Pick a Monthly Payment
Source: Slash Your Debt : Save Money and Secure Your Future (Financial Literacy Center, 2001), by Gerri Detweiler, Marc Eisenson, and Nancy Castleman. Used with the authors’ permission.
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