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4 Tips to a successful debt consolidation

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4 Tips to a Effective Debt Consolidation

Set a budget, stop using your credit cards and evaluate consolidation alternatives to consolidate your debt successfully.

The article was written by Amrita Jayakumar Writer The Washington Post Amrita Jayakumar is a former special-assignment journalist for NerdWallet. She also wrote a syndicated column about the financial situation of millennials, and focused on personal loans as well as consumer credit as well as debt. Prior to that, she was a reporter at The Washington Post. Her work has appeared on newspapers such as the Miami Herald and USAToday. Amrita holds a master’s degree of journalism at University of Missouri. University ofMissouri.

Nov 28, 2022

Edited by Kathy Hinson Lead Assigning Editor Personal financial, credit scoring, financial management and debt Kathy Hinson leads the core personal finance team at NerdWallet. Previously, she spent 18 years with The Oregonian in Portland in capacities such as chief of the copy desk and team editor and designer. Her previous experience includes news and copy editing for several Southern California newspapers, including the Los Angeles Times. She graduated with a bachelor’s in journalism and mass communications in The University of Iowa.

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When your personal finances teeter on the brink the first thing you’ll do is be to do something drastic. You can freeze your credit cards in the form of a block of ice. Vow not to eat at restaurants again. Forgo your Netflix subscription.

These strategies can be helpful however, experts in finance say it is a more complete strategy. A common approach includes debt consolidation. This involves combining multiple debts into a single loan and credit card with an interest rate that is lower.

“Consolidating debt into one spot can be motivating and beneficial from a psychological perspective because it feels manageable,” says Mathew Isaac, associate professor of marketing at the Seattle University’s Albers School of Business and Economics.

But is not a solution that works for everyone.

Consolidation is a good option for high-interest loans like credit cards. Households that carried the debt of credit cards had balances averaging $6,849 and costing an average of $1,162 in annual interest, according to the study conducted in 2019 by NerdWallet.

The people whose earnings and expenses aren’t enough to resolve debt problems through credit counseling or consolidation, may want to consider bankruptcy, suggests John Rao, an attorney at the National Consumer Law Center.

Consolidating your debt is only the start of a long process. Here are the four steps to make it happen.

Watch your debts dwindle

Create an account and link your cards, loans and accounts to keep them all in one location.

Set a realistic spending limit

“In in order to ensure that the consolidation process can be effective it is necessary to have a clear plan of attack,” Isaac says.

A allocates money for debt payments as well as an emergency fund, and the contribution to retirement savings, but that isn’t enough when consolidating, says Lara Lamb, a certified financial planner with the California company Abacus Wealth Partners.

Successful budgeters stay clear of debt by accounting for infrequent costs, like car registration fees and periods of the year where expenses are high, such as the holidays, Lamb says.

They also allow for enjoyment.

“People are likely to embark on a”diet” of spending and then think they’ve stayed in check for too long, and then go out and splurge,” Lamb says. “A sensible budget allows you the funds to invest in things that you appreciate and enjoy.”

Quit using your cards

A fundamental rule in consolidation is to avoid using your credit cards as you pay off your debt.

The majority of people cut their credit cards, lock them away or store them in ice, methods that may sound extreme, but are, according to experts, efficient. These strategies are often referred to as “commitment devices” and can help people reach long-term goals, says Rebecca Rouse, director of the Financial Inclusion Program at Innovations for Poverty Action, a nonprofit that has conducted research on debt repayment.

To stay committed, write down why you’d like to become debt-free and how often you’ll pay your bills, and set periodic reminders to check your progress, Rouse says.

The act of locking away your cards does not require closing your account that could harm your credit score. The only exception to the no-use policy is a nominal charge on your credit card every couple of months — to be paid promptly and completelyto keep the account active and your credit safe according to Shawn Tydlaska, a certified financial planner at California company Ballast Point Financial Planning.

Compare the products of consolidation

let you shift over the debts of other cards and they don’t charge any fees for a certain period of time The best cards allow between 15 and 21 months — then a double-digit rate rate kicks in. A majority of credit cards have fees for balance transfers and require good credit scores and incomes that are high to qualify.

To increase your chances of being approved to increase your chances of getting one, you should add all possible sources of income, including savings accounts and 401(k) — – and then list the total when you apply, but not just your salary, Tydlaska says.

They typically have low interest rates than credit cards and you are able to borrow more cash. Rates are based on your credit history and the amount of debt you carry. A lender who sends money straight to your creditors could eliminate the incentive to spend the cash instead of making use of it to pay off debt. There are only a handful of lenders, including Wells Fargo, Discover and FreedomPlus provide this option.

>> MORE:

Find support for your mission

It can feel like something to be ashamed of however peer support can be an effective motivator that can make people accountable, say Isaac and Rouse.

Support groups for debt, online forums , or a close family member can help you stay in the right direction to reach your goals. Even online lenders — like Prosper and Payoff — offer tailored recommendations or apps to motivate borrowers.

About the writer: Amrita Jayakumar is a former writer for NerdWallet. She has previously worked for The Washington Post and the Miami Herald.

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