Don’t Consolidate Your Debt Without Doing These Things First

There are some do’s and don’ts to remember when consolidating debt. Here’s a closer look at the most important things to do before moving ahead with debt consolidation.

Save $2,000 in Emergency Savings

An emergency fund is a stash of money you can draw on when an unplanned expense comes your way. For example, if your car breaks down, your HVAC system conks out, or your dog needs life-saving veterinary care, your emergency fund will cover the expense. Your emergency fund is crucial when consolidating debt because it acts as a buffer between you and additional debt.

“A small emergency fund prevents setbacks by covering unplanned expenses, which helps avoid new debt and discouragement,” says R.J. Weiss, certified financial planner and founder of The Ways to Wealth. “Without it, relying on everything to go perfectly is unrealistic and can lead to failure.”

If you’re starting from $0 in emergency savings, take a look at your budget. The goal is to find extra money — any amount is fine to start with — that you can contribute to your rainy day fund. Once you find the money to set aside, you can open a high-yield savings account to hold it.

High-yield savings accounts at online banks can offer higher interest rates than traditional savings accounts and charge fewer fees. You can schedule recurring deposits into savings each payday to watch your emergency fund grow automatically.

Find the Right Financial Solution

If you’re looking for the best financial solution for consolidating your debt, use our search tool to get started. Compare debt consolidation lenders, and find the best rates offered right now.

Put the Credit Cards Away

Debt consolidation only works if you’re committed to not creating any new debt. If you’ve relied on credit cards until now, it’s time to break the habit.

Should you cut your cards up? Not necessarily, but it’s wise to remove them from your wallet and put them in a secure place. If you think you might be tempted to use them if they’re tucked away at home, you might open a safe deposit box at your bank, which isn’t as easy to access.

It’s also a good idea to unlink or delete your credit cards from online shopping sites or apps if you’ve saved your card details. The goal is to make it harder to use credit to spend.

This is especially important if you’re using a balance transfer to consolidate credit card debt. Balance transfers let you move your debt to a single card, leaving your other cards with low or $0 balances. Continuing to use those cards after transferring balances could leave you with more debt to repay.

Get to the Root Cause of Why You Got Into Debt

Debt can happen for a variety of reasons. For instance, a health crisis, job loss, or divorce could leave you with debt you didn’t anticipate.

However, debt can also result from poor spending decisions or money habits. For example, failing to make a budget or giving in to impulse buys could lead to debt.

Analyzing your financial situation can give you insight into why you got into debt in the first place. For instance, if overspending is the issue, you may want to consider the emotions or triggers driving your decision-making.

Evaluate Your Consolidation Plan

With different options for consolidating debt, choosing the one that best fits your situation is essential. Say, for example, you want a personal loan to consolidate your unsecured debt. In total, you owe $20,000 to credit cards.

Questions to answer:

• Can you qualify for a personal loan to consolidate debt based on your credit scores and income?

• Can you get a lower interest rate on a consolidation loan than what you currently pay on your credit cards?

• What will the new monthly payments be, and will they be higher or lower than what you’re paying for all your debts now?

Likewise, if you plan to use a credit card balance transfer, you’d need to consider how long you’ll have to pay off debt at the introductory rate.

You might have anywhere from six to 21 months to pay off a balance transfer at 0%, but you need to be sure you can manage the required payments within that time frame.

Assess Income vs. Expenses

It’s challenging to get ahead with debt repayment when your expenses exceed your income. If you haven’t reviewed your spending and income yet, add that to your to-do list before consolidating debt.
Start by adding up your monthly expenses, then subtract the amount from your monthly income. This will tell you at a glance whether you’re spending more than you earn.

Fixed expenses often take up the majority of the budget, says Weiss. If that’s true for you, Weiss says to avoid the mistake of cutting expenses without a clear plan.

Review each expense to understand where your money goes. As you look at each expense, ask yourself whether it’s something you can reduce or eliminate. If it isn’t a necessity, don’t be afraid to erase it from your budget.

Compare Costs

Debt consolidation typically involves paying interest and fees. Before you consolidate debt, it’s essential to weigh the costs.

If you’re getting a personal loan, carefully consider the interest rates and fees the lender might charge. Typical fees for a personal loan can include application fees, origination fees, and prepayment penalties.
With balance transfers, compare the promotional rate to the regular variable APR and consider how long the introductory rate lasts. Remember to factor in the balance transfer fee if the card charges one.

Get Help If You Need It

If your debt feels overwhelming, talking to a credit counselor can offer some perspective on your situation and the solutions available. A credit counselor can review your budget, spending, and debt and offer options best suited to your needs.

Those solutions might include:

• Consolidating debt with a personal loan
• Enrolling in a structured debt management plan (DMP)
• Resolving debt for less than what’s owed
• Filing bankruptcy

What Do We Mean When We Say Debt Consolidation?

Debt consolidation simply means combining multiple debts into one. You can simplify debt repayment by replacing multiple debt payments with just one each month. It’s possible to save money with debt consolidation if you get a lower interest rate. However, that’s typically not the primary goal.

You might consolidate debt in any of the following ways.

• Unsecured personal loan
• Home equity loan or line of credit (HELOC)
• Credit card balance transfer

You could also borrow against your 401(k) or ask friends and family for a loan, though those options have pros and cons. Tapping into your retirement account means you’ll have less money saved once you’re ready to leave work behind. Borrowing from people you know can get tricky if you run into trouble with repayment.

Pros and Cons of Debt Consolidation

Consolidating debt has advantages and disadvantages. Considering both can help you decide if it’s right for you.

That last con is essential to watch out for, as you want to avoid getting duped into paying a seemingly legitimate company for debt consolidation services only to find out they’re fraudulent.