Debt consolidation can be a good option for individuals who want to streamline their financial lives and avoid the stress of juggling several loans. This involves taking all your debts and combining them into one, so it’s easier to pay off, which gives you breathing room to focus on other aspects of your finances.
But if you make mistakes, one big loan will be just as bad or worse than having several smaller ones. After consolidating your debt, make sure you have a plan in place to not fall back into old habits by setting concrete goals around paying down your new loan, tracking your finances, and acting on any financial red flags that signal trouble brewing.
At Alpine Credits, you can opt for debt consolidation through home equity loans with competitive interest rates.
Mistakes to avoid in the aspect of debt consolidation
Debt consolidation may seem like the magic bullet to end your worries, but it’s not all sunshine and rainbows. Whether you choose a debt management program or a debt consolidation loan, there are some things you require to be aware of before you sign on the dotted line.
Know the root cause of debt
Debt consolidation can be an excellent approach to getting a grip on your finances. But if you find yourself slipping back into your old habits, you could end up right where you started. Debt is like a game of whack-a-mole—you may work on one part, but another pops up in its place. That’s why it’s crucial to look carefully at how you got into debt in the first place and try to avoid those same mistakes after consolidating.
- First off, figure out what makes you spend more. Ask yourself: What makes me want to spend money? Is it being out with friends? The feeling that I’m not getting enough done? Once you know what they are, you’ll be better equipped to avoid them in the future.
- The next step is to start tracking your spending patterns. Whether you do this with $5 envelopes or an app like Mint, it’ll help you control your spending by showing where your money goes each month. When you have a clear picture of where it’s going, you’ll be better equipped to find places where you can cut back.
- Be sure to leave room for unexpected expenses and fun money in case of an emergency. Once you’ve figured out the root concern and how to prevent it from happening again, create a spending layout for yourself and stick to it!
Evaluating all the alternatives
It’s easy to get glued to the idea that debt consolidation is always a good option. One of the biggest initial blunders you can make is not considering all your debt consolidation options. You might be tempted to jump on the one that sounds easiest, but it’s important to understand the upsides and downsides of each option carefully.
Studies show that people who take the time to research their options are more likely to choose a plan that helps them get out of debt faster. And while it can be a great solution, there are some things to keep in mind:
- First of all, not all debt consolidation options are created equal. For example, if you’re looking at a credit card balance transfer, make sure you’ll be able to pay off the required balance within the introductory timeline. Otherwise, you run the risk of paying interest on the remaining balance.
- If you’re planning on shelling out a personal loan, be aware that many lenders charge an origination fee—sometimes as high as 5% or 6% of the amount you borrow—which can add significantly to your overall cost.
So take some time to look at all your options and think about what will work best for you. You’ll want to factor in not just how much each option will cost but also how convenient each option is and whether it will fit with your lifestyle and goals.
Home equity loans can be an easy and secure way to end your high-interest debts. Experienced mortgage brokers at Alpine Credits can help you connect with the right financing entity.
It’s easy to fall prey to old habits. After consolidating your debts, you may simply feel a bit of relief and use the extra money in your budget to buy things or pay for monthly expenses that you don’t need. This kind of spending will only get you back into debt again, defeating the whole point of consolidating your debts in the first place.
Simply making all your payments on time after you’ve consolidated will help you reestablish a good credit score. However, if you want to see even better results, take advantage of the opportunity to show lenders that you are genuinely trustworthy.
Put away the credit cards and go for cash or debit for a while – showing that you can live without the credit is one of the fastest ways to improve your credit score.
However, the goal shouldn’t be to get out of debt—it should be to stay out of debt consistently. Consolidating your credit card debt means you’re looking at the big picture and thinking long-term about how you want credit to work for you.
For example, if you want a mortgage in the next five years, paying down your credit cards isn’t enough. You’ll also need to look at how different payment plans will affect your credit score. When you think about ways to pay off your debts, make sure that you have a plan for what comes after that as well. It’s time to get honest about what kind of relationship with the credit you want in the future and plan how to get there.
Not paying debt timely
It is important to have a specific pay date. This will help you plan your expenses and make sure that you are not spending more than the amount of your salary. If you do not save enough money to cover your debts, you will be forced to borrow money again and get deeper into debt.
If you have a specific payment date for the debt consolidation loan, this helps you plan your finances easier. Set aside a certain amount of money each month on the same date and ensure that there is adequate money to cover the payment each month.
While debt consolidation may seem like the easy fix for your complicated financial situation, it’s a serious decision that should be treated as such. Debt consolidation is not a solution but a tool in your belt that helps you manage and eliminate your debt.
Debt consolidation loans can be good for you if you make the right decisions. However, given above are some things to avoid if you want to make sure your debt consolidation loan works in your favour instead of against it.