When times get tough and money is tight, many people look for ways to alter their finances and reduce their budget. For those with large amounts of credit card debt, the use of a consolidation to make payments more manageable is a popular option. Whether done on your own or with the help of a debt consolidating professional, credit card consolidation is a viable alternative to bankruptcy. Debt consolidation can help you pay off your debt more quickly and give you more financial freedom in the process.
Step 1
Gather your most recent credit card statements. Add together the balances of each account to calculate your total debt. Check what the interest rate for each account is to assess which credit cards are costing you the most money. Credit cards that have higher interest rates will cost you more money in the long run and will take longer to pay off, making that account a priority.
Step 2
Choose a debt consolidation method. There are pros and cons for each of the forms of consolidation, so learn about all aspects before making a decision. Talk with a financial counselor if you feel you would like more assistance in choosing.
One popular option is to borrow money from a bank or other lending source. Other options include a line of credit from a bank, a home equity loan, or refinancing an existing mortgage. You may also consider transferring all of the credit cards to a single card with a low interest rate. Some people decide to borrow the money from family members or close friends, but this option can have significant personal risks and may damage relationships if you are unable to pay for some reason.
Look at the interest rate on the different options, as the lowest interest rate will save you the most money and pay off the debt the quickest.
Step 3
Consolidate all of your credit card debt into one single debt. Most often, this is done by using the money from the consolidation loan to pay off the balances of each card, leaving one larger remaining loan to pay. When using your mortgage to consolidate, this differs in that you are now paying less on your mortgage loan and using the excess to pay down credit cards more rapidly.
Step 4
Pay off your consolidation loan as fast as you can reasonably manage. Pay at least the required minimum monthly payment on the loan. If you can, pay more than the minimum each month to help get out of debt faster and save money on interest over the life of the loan. Check, however, that your loan doesn't have any penalties that you will incur for early pay-offs. If it does, check that against what you will pay in interest to see which will be the better deal in the long run.
Step 5
Be wise with the use of your money while you are getting out of debt. Remember that any penny you save can be applied to paying off your loan faster and save you money in the future. Use any excess money that you have to go toward paying down your consolidation loan. Refrain from any unnecessary purchases or upgrades to current commodities (like cable or cell phone plans) until you are debt free.
Tips and Warnings
- Talk with a financial adviser or a credit counselor from a nonprofit agency to determine what type of consolidation loan, if any, is right for your personal situation.
- Debt consolidation may reflect poorly on your credit score but may be better than the inability to make payments or get out of debt at all. Weigh your options carefully.
Member Comments