According to Debt.org, credit-card-carrying American households owe $15,000 on average in credit card debt alone, and Reuters reported in February that U.S. household debt had reached over $14.15 trillion, which exceeded the nation’s previous high of $12.68 trillion during the 2008 recession. With high interest rate debt increasing rapidly, households stand to benefit and save big-time by consolidating debt into lower interest rate loans. If you are thinking about consolidating debt—whether to simplify monthly payments or save on interest—follow these tips to do it the smart way.
Address Deeper Concerns
If you devote too much monthly cash to certain bills, have a spending problem, or simply operate without a household budget, you could wind up swiftly needing another loan to consolidate more debt. A debt consolidation loan works best with a balanced budget and responsible spending.
Learn how to lower your spending with these popular tips.
Understand the Difference Between Consolidation and Settlement
A consolidation loan moves all or some of your existing debt into a single, manageable loan, whereas a debt settlement occurs when a creditor agrees to forgive a debt after receiving less than full payment. On a credit report, settlements appear as “Settled” or “Paid Settled,” rather than “Paid in Full.” Although credit scores change at highly variable rates depending on all sorts of different factors, according to these hypothetical credit report scenarios released by FICO, a single debt settlement has the power to significantly affect your credit score – whether it is currently high or low.
Be Smart When Selecting Debts for Consolidation
One major perk of debt consolidation is reducing the number of payments you have to manage each month. Consolidating debt simply to reduce the number of payments you make monthly, though, is not always the best financial decision. A consolidation should also save you money in interest and fees. Be sure to consolidate only debts with higher interest rates and consider setting up auto-payments for the rest.
If you’re looking for lower rates the Credit Union may be able to help! Check out these Personal Loan rates.
Avoid Using Credit Cards
Once you have consolidated your debt, especially credit card balances, it can be tempting to begin charging items again. Although one small purchase does not create an unmanageable balance, several minor expenses add up quickly. Remember you still owe the same amount as before consolidating your debt and refrain from using your credit cards.
Build an Emergency Fund
A key factor in avoiding high-interest credit card debt after consolidating your existing debts is to have a financial plan in place to handle emergency expenses. Start a separate savings account to cover unexpected costs in the event of a medical emergency or car repairs. With consistent deposits over time—like $100 from each paycheck (automated transfer is ideal)—you’ll be surprised how quickly your fund builds over time. A rule of thumb is to aim to save up $1,000, then shoot for three months of expenses, six months, and a year.
Our Rainy Day Savings account is made for this purpose, with super-high interest and no minimum balance. When you use it with our Direct Deposit for automatic transfers, you’ll get a lot more valuable perks too, that can save and earn up to hundreds of dollars a year.
The Bottom Line
If you have multiple monthly payments, high interest rate credit cards, or simply want a lower your payments, then a debt consolidation loan might be right for you. For more information about managing your debt, and consolidating with potentially lower rates, speak to your Credit Union. Chat with us online.
This article was developed in partnership with FI Grow Solutions