Define Your Goals, to Find the Right Debt Consolidation Option
Editor's note: After reading this article about debt consolidation goals, make sure to also read about your options to consolidate debt.
Our Top 5 Tips to Prioritize Debt Consolidation Goals:
When you look to consolidate debt you have several competing and very different options, from services like debt management, debt settlement, or credit counseling to loan products like debt consolidation loans and mortgage refinancing loans. Before comparing solutions, you should start by reviewing your general financial situation and your goals. To make it simple, use this guide to help you tick through these items one by one.
1. Credit Check
It's a very reasonable goal to have excellent credit; it is something we all should aspire to. Achieving an excellent credit rating is about more than paying your bills on time. If you don't have good credit to start with, it makes sense to focus on resolving your debt problems. If you do have excellent credit, but are still struggling with debt, you may have to decide which goal is more important: preserving your credit rating or getting out of debt. A basic rule is that it is easier to rebuild your credit than to pay off your debt.
Start by viewing your credit report. You can't make an intelligent decision about the importance of the effects on your credit rating, if you don't know where your credit rating is to start. There are many places where you can get a free credit report. On any credit report you can see how much you owe and who you owe. Some places charge a fee to get a report, but we recommend getting a no-cost, no-gimmick credit report at AnnualCreditReport. The government allows each American to pull his or her credit for free, from each credit bureau, once per year.
AnnualCreditReport reports do not include your credit score. If you want to view your credit score, you need to go somewhere else. There are many places that offer free credit reports online, but they require you to sign up for credit monitoring or privacy protection. You can usually get your score for free without obligating yourself to pay for the service, as long as you cancel your membership within a week or two.
2. Budget Check
The next step, typically, is to look at how much you can afford to pay to consolidate your debt each month. If you are keeping a budget, that is terrific. If you are not, Bills.com offers a handy and free Budget Guide available for you to start the budgeting process. Figure out your after-tax income and your best estimate of your monthly expenses. Don't forget to factor in important expenses that you don't pay on a monthly, like car registration, car insurance or property taxes. If you have any money left over, after paying your budgeted expenses, you should apply it to your debt pay-down plan. If you do not know what you are paying today, or don’t really have a good sense of your monthly debt costs, please use our Debt Calculator, an interactive minimum payment calculator. If you can't pay all your bills, start trimming any unnecessary expenses. To see how much money you can save, over time, by eliminating or cutting back on different expenses, look at the new Bills.com Savings Machine.
3. Asset Check-Up
List out all of your debts and your assets. Figure out what your key assets are worth and how much you owe on them. Once you know the value of your home, vehicle, or 401(k) plan value, you can make an informed choice about using your assets as past of your debt consolidation solution. It may make sense to take consolidate your debt by taking a loan and using one of your assets as security. For instance, if you can afford to make your payments and have equity in your home, then look to consolidate debts into one loan, with a debt consolidation personal loan or a mortgage refinance loan.
4. Goal Check
Now you know what you owe, the net value of your assets, your income, and your monthly available cash-flow. Next, you need to prioritize your goals. Your specific goals and priorities heavily influence the choice you make for the best way for you to consolidate your debt. When it comes to options to consolidate debt you just can’t have your cake and eat it, too. Bills.com recommends sorting out what is most important to you on these goals:
- The size of your monthly payment: Do you need to reduce your monthly payment in order to meet your bills?
- Total cost- How important is to you get out of debt at the lowest possible cost? What trade-offs are you willing to make, to get out of debt at a low cost?
- Time to debt freedom: Where do you rank the length of time it takes for you to become debt free.
- Credit rating: How important is your credit rating to you? Would you consider a way to get of debt, even if it harms your credit score?
- Willingness to risk home equity(if you own a home with equity): If you are eligible to borrow from your home's equity, is the risk of turning unsecured debt into secured debt worth the money you can save if you consolidate debt in a refinance or HELOC?
- Stress: How well do you handle stress. Is saving money worth dealing with a creditors’ collection process?
After doing some soul searching, you should be able to prioritize your goals. Frequently, a financial adviser or debt consultant can be a very good resource to help you understand and sort your financial goals and priorities.
5. Compare Debt Options
If you can afford 2.5% of the face value of your debts, then look to credit counseling. If you have impaired credit and want the lowest payment and your primary goal is to just get out of debt in shortest amount of time, then evaluate debt settlement providers. If you cannot afford any monthly payments towards your debts, then you may want to speak to a bankruptcy attorney about your bankruptcy alternatives. But no matter your situation, you have choices when looking to consolidate debt, so be sure to understand your goals and options before choosing a debt solution.
Debt Coach: Your Personalized Free Check-Up:
We saved the best tip and trick for last: A new tool can do all of this for you for free! Bills.com just launched an easy, fun to use Debt Coach tool to help you go through this entire process in about 10 minutes online, at no cost! Debt Coach will evaluate your situation and tell you which solution is the best suited for you, based on your specific goals.