Tackling and Consolidating Debt and Credit
There is no one-size-fits-all approach to consolidating debt. However, there are some very important steps to take to find the best debt consolidation tactic. With so much debt and different types of debt, it can be very confusing to match a debt consolidation tactic that fits your financial situation.
Did you know that more than 50% of the US household have credit card debt? The total credit card debt is about $830 billion, and the average borrower balance (for those with credit card debt) is $5,400. However, credit card debt isn’t the only type of debt. The chart below, taken from the NY Federal Reserve’s Regional Household Credit Snapshot shows the percent of consumers that have five different types of loans, as well as the average balance for those who do have loans. Remember, this does not include other bills and debt, such as medical debt.
Think of your debt as an overall part of your financial picture. Is your debt helping you increase your overall financial well-being? For example, instead of renting did you buy a home? Your home mortgage loan is a great way to build equity and live in a house of your own. However, if you are building up a lot of personal debt, including credit card debt, then most likely you are either in financial hardship or mismanaging your finances. Instead of building equity, you are paying lots of interest to service your debt.
Three preliminary steps to consolidate your debt:
Before you start to consolidate your debt, take these three steps to ensure that you understand your financial situation:
- Check Your Debt Status: Make a list of all your debts, interest rates, monthly payments, and payoff dates. You can find a large part of that information on your credit report. For a free copy check out annualcreditreport.com
- Check Your Assets: Make a list of your assets including savings funds, investment portfolio, retirement funds, and house. Do you have adequate savings?
- Fine-tune your budget: Keep a budget and check to see if you can cut costs and increase your income.
Define Your Goals
Consolidate Your Debt to Meet Your Goals: Your next step is to define your goals. You need a clear understanding of what you want to achieve and how it will benefit you to make the right debt consolidation choice.
Many different approaches exist, to help you consolidate debt, so you need to do your homework. Only by weighing the pros and cons of each solution, can you know the best option for your situation. Think about which of the following goals is most important to you;
- Improve Your Cash Flow: Reducing the size of your monthly payments frees up funds you can use in a variety of ways.
- Get Out of Debt as Fast as Possible: Becoming debt free allows you to focus on building wealth, establishing a rainy-day fund, or buying a home.
- Protect Your Credit: You may need to weigh if it is worth harming your credit, to get out of debt faster.
- Get Out of Debt at Lowest Total Cost: Reducing your overall costs puts more money in your pocket to use for achieving other financial goals.
- Reduce Your Debt Stress: Stress can come from fear of missing a monthly payment, repeated collection calls, or by the uncertainty of having no defined plan in place. Achieving greater peace of mind may be your primary goal.
Also, think about your financial situation and how you can realistically meet any goals that you set. If you are struggling with minimum payments, then protecting your credit is not realistic. If you have bad credit, then your debt consolidation options are limited.
Matching Financial Goals to Debt Consolidation Solutions
There are different ways to consolidate your debt. The most common one is a debt consolidation loan. However, that solution is only going to work if you have strong enough credit to qualify for low interest rates.
Here are examples of four ways to consolidate your debt and how they mesh with different financial goals.
Do-It-Yourself / Optimize Payments: If you have extra money coming in each month, good savings, and decent interest rates, then you can add extra money each month to your monthly payments. While this tactic doesn’t really consolidate your debt, or bills, it is an effective way of paying off your debt in a fast and orderly manner. Use either the avalanche method (pay off the highest interest rates first) or the snowball method (pay off the lowest balances first). With this method you can get out of debt quicker, protect and build your credit, and reduce your overall financial costs.
Cash-Out Mortgage or Home Equity Loan (HEL): If you have extra equity in your home and you want to reduce your monthly payments, then you can consolidate your debt by taking a cash-out refinance, or a Home Equity Loan. Your best choice will depend on whether the new interest rate will save sufficient money to warrant doing a full cash-out mortgage refinance. If not, you can consolidate your debt by taking out a HEL. This debt consolidation tactic will help you protect your credit, improve your cash flow, and reduce your debt stress. However, since you lengthen the time of your loan, you will not get out of debt so quickly, now will this be at the lowest cost.
Debt Consolidation Loan: If you have good to excellent credit, then a debt consolidation loan is an excellent debt consolidation tactic. It allows you to get out of debt faster, protect and build credit, and lower your financial costs. It will entail making a firm commitment to a fixed monthly payment, so make sure that you can afford the payments.
Credit Counseling and Debt Management Plan (DMP): If you can make minimum payments and commit to a fixed payment then a DMP program can help by reducing your interest rates on your credit cards. Instead of making payment directly to your creditor, the DMP company will collect your money and pay off the creditors at a negotiated rate. This allows you to simplify your monthly payment and reduce your debt stress. It is basically a middle of the road approach helping you to get out of debt quicker, reduce your financial costs, and cause slight harm to your credit.
Debt Settlement Program: A debt settlement company negotiates your debt with your creditors. You stop making payments directly to your creditor and your credit will drop, if it hasn’t already been damaged by delinquent payments. This debt consolidation program is for people with financial hardship. If eligible, it will free up cash and help you get out of debt faster at a low rate. However, this will be at the expense of a damaged credit, which is generally not an issue for people in financial hardship. Also, expect a lot of stress as your creditors may pursue legal actions, including collection calls, and lawsuits.
Need Help to Find the Best Way to Consolidate Debt? If you are still not sure which debt consolidation tactic is best for your situation, then check out BIlls.com innovative tool, the Debt Navigator. With just a few questions and a soft pull on your credit, you can get a free personalized solution to help you get debt free.