1. List Out Your Debts
Before you can start your debt consolidation journey, you need a map. The first step is to get a clear picture of your current financial situation. Gather your most recent credit card and loan statements and review how much you owe, what interest rates you’re paying, and what your minimum monthly payment is for each. Adding up your debts can feel intimidating, but can help you see exactly what you’re up against.
2. Check Your Credit Score
Your credit score is very important in determining which debt consolidation offers you’ll qualify for. In general, a higher score will provide access to lower interest rates which can help you save money over time. You’re entitled to a free credit report from each of the three major credit bureaus once per week from AnnualCreditReport.com. These reports can help you identify things that could be harming your credit score, such as missed payments, late payments, and high credit card usage. However, these free reports don’t typically include your actual credit score. If you’re interested in viewing your score, and receiving tips to improve it, consider opening an account at a bank with free credit tools, like Bank5 Connect.
3. Explore Your Debt Consolidation Options
Debt consolidation isn’t a one-size-fits-all process. The right debt consolidation strategy will depend on your unique financial situation, including your current credit score, monthly expenses, income level, and homeownership status. Here are some potential strategies to consider:
• Take Out a Personal Loan. Interest rates on personal loans are typically lower than credit cards, which can make them a good option for paying off high-interest credit card debt. You can take out a personal loan and use the funds to pay off your credit cards or higher-interest loans. And, since most personal loans have fixed rates, you’ll pay back your loan with one predicable monthly payment.
• Tap Into Your Home Equity. If you own a home, borrowing against your home equity could provide a lower interest rate than a personal loan. Using your home as collateral, you could take out a home equity loan and use the funds to pay off your debts. Another option is a home equity line of credit, commonly referred to as a HELOC. A home equity line of credit works somewhat like a credit card. You are granted a credit limit, and you can withdraw funds as needed up to that amount. As you make payments toward the amount borrowed, your available credit limit replenishes. Keep in mind that with home equity loans and lines, your home is used to secure the loan. This means that if you fail to make the agreed-upon payments, you could put your home at risk of foreclosure.
• Transfer Credit Card Balances to a New Card. Many credit card providers offer cards with low- or no-interest introductory periods. These cards allow you to transfer your existing balances from higher-interest cards, so you can work on repaying your debt without additional interest charges slowing you down. Bank5 Connect has several credit card options with a 0% introductory APR. Keep in mind that while these cards can be a fantastic debt repayment tool, you’ll want to make sure you can repay your entire balance before the introductory period ends. Otherwise, it might be difficult to repay the remaining balance once the interest rate increases.
4. Compare Offers and Choose the Best Fit
Don’t just pick the first debt consolidation offer you come across. Compare your options side-by-side, looking closely at the interest rates, introductory offer lengths, repayment terms, and any fees like loan origination or balance transfer fees. Taking the time to choose the right debt repayment strategy could save you a significant amount of money in the long run.
5. Apply for Your Loan or Credit Card
Once you’ve decided on the best debt consolidation product, whether it’s a personal loan, balance transfer credit card, or a home equity line or loan, it’s time to apply. First, you should be sure that your credit score is sufficient for the loan or card you’re applying for. Double check with the lender to understand the minimum credit score requirement before applying, as too many applications can hurt your score.
6. Pay Off Your Existing Debts
No matter which debt consolidation option you’ve chosen, you should start paying off your debts immediately. If you’ve moved your balances to a credit card with a low introductory rate, aim to pay as much as possible each month to eliminate your debt before that rate expires. If you get a lump sum from a loan or line of credit, use it right away to pay off your debts so you don’t have those bills anymore. Remember that the focus is on simplifying your finances.
7. Build a Budget to Stay Debt-Free
Consolidating your debt is a smart financial move, but it's the first step on a longer journey. You should change your financial habits to avoid piling up debt again in the future. To help stay out of debt, create a monthly budget that aligns with your income and financial goals. Ensure you aren’t overspending and only borrow what you can truly afford to pay back. Remember that credit cards aren’t “free money”. With most cards, you’ll be charged interest if you don’t pay off your statement balance in full each month. If you find you’re often tempted to overspend with a credit card, consider switching to a debit card for your everyday purchases.
Consolidating your debt will not only help your financial future, but it can also lift a heavy weight of stress off your shoulders. By combining multiple debts, you can simplify the repayment process and work your way toward financial freedom. Take it one step at a time, be patient with yourself, and know that a simpler financial life is within reach.