Debt consolidation is only helpful if you do it right. Consolidating your debt when it’s not really the best option for your situation will only do more harm to your finances. If you’ve been contemplating consolidating your debt, then you must understand in what type of situations it’s beneficial and how to ensure you make the right choice. Sometimes, however, the problem isn’t that you picked the wrong plan but that you didn’t stick to it or you racked up more debt after consolidating.
Can You Get a Lower or Fixed Interest Rate?
One of the most important things to ask yourself when contemplating whether to consolidate your debt or not is “Can I get a lower or fixed interest rate?” If the interest rate on your debt consolidation loan is higher than that of your debts, then you shouldn’t consolidate. You would end up paying more money in that situation.
If you have a variable interest rate on one of your cards, then it’s usually a good idea to consolidate for consistency and peace of mind. It can be very stressful and upsetting when your interest rate suddenly skyrockets. By consolidating your debts, you will receive a fixed interest rate, giving you a better chance at paying off your debt without adding stress and unpleasant surprises.
If It Will Take Longer Than 1 Year to Pay Off Your Current Debt
One of the benefits of debt consolidation is it provides a specific time-frame for paying off your debt. A debt consolidation loan is usually set to end within 3-5 years as long as you make the minimum monthly payment each month. In comparison, it could take you longer to pay off credit card debt via making the minimum payment each month because of the interest.
If it will take longer than one year to pay off your debts, then it’s often a good idea to consolidate your debt. In most instances when your debt can be paid off in less than a year, it’s not worth consolidating the debt. However, if the debt you have is unmanageable, then it would be worth considering debt consolidation to make it more manageable.
Remind Yourself of the Danger of Complacency
You should never consolidate your debt without making a debt repay off plan first. It will show you whether or not you’re able to easily make the payments each month. If it would be too difficult, you should look for a better lender. Assuming that your debt repay off plan based on a loan’s terms is feasible for you, then hold onto the plan and stick to it. Don’t allow yourself to miss a payment or it will only prolong becoming debt-free.
As part of your plan, you should also ban yourself from using the credit cards you have consolidated until you have completely cleared your debt. You don’t want to risk adding more debt to what you already have. If you’re not good at resisting the urge, then close the accounts after they have been consolidated.
You must know how to tell if debt consolidation is a better option than what you’re currently doing to pay off your debt. Signs that consolidating your debt is a good idea are a variable interest rate on your current debt, a lower or fixed rate on the consolidation loan, and debt that can’t be paid off within a year. Debt consolidating is usually best for debts that take a year or longer to clear and unmanageable debts.