Debt consolidation loans can be a useful tool to pay off credit card debt but only if you use it correctly.
What Is Debt Consolidation, Anyway?
Debt consolidation is trading a single debt for a number of them, such as using a new credit card to pay the balance on two or more others. The pros of this solution are:
- Obtaining a lower interest rate on the new card than on the cards you are paying off
- Having a minimum monthly balance below that of your old cards combined
- Feeling empowered and hopeful about your ability to get out from under your debt by reducing your number of monthly bills
There is sometimes confusion of debt settlement or debt management for debt consolidation. The first two do not change your current creditors. They involve other people negotiating new terms for your old contracts. The problem with these options is a possible negative effect on your credit score because the payments you continue to make are not given immediately to your lenders. With a debt consolidation loan your creditors are immediately paid and your credit score is not negatively impacted.
Debt Consolidation May Not Be Perfect
You will have a new line of credit and lower payments. It is all too easy to find yourself using the additional money meant to pay off your debt consolidation loan for purposes other than paying more than your minimum balances or using your new card to increase your debt. It will be important to recognize how you got into the predicament you are in and take strict steps to avoid the temptation of repeating them.
Pay Off Your Debt Consolidation Loan
Take some time to examine the way you created the debt. It could be that you are just not great at controlling your impulse to purchase things you enjoy, or perhaps you feel pressure to keep up with those around you. Not all debt is a result of overspending. It could be that you had a medical issue or home emergency that required you to make financial decisions you might not have otherwise made. Whatever the case in order to pay off a debt consolidation loan you will do well to continue to make the payments you did before over and above the new minimum due, if not more. This will ensure you are paying off as much as possible of the principle of the new loan.
You could use a peer to peer or home equity loan to consolidate your debt instead of a credit card. These loans are closed-ended so you will know the date that the loan will be paid in full even if you can only make the minimum payments each month. Emotionally this can be a great motivator. Being able to see the end of your financial struggles will allow you to plan for great things to do when your goal is accomplished and stay on track. There is another benefit to these options. There will be no additional credit card to tempt you into purchases you cannot afford. With a credit card consolidation you must be sure you can pay off the entire debt before your lower interest rate period ends. If you are not positive this can be accomplished you could end up with higher monthly minimums than before. This can lead to opening new cards for more balance trading and may end up ruining your credit as much as loan management or debt settlement. Now is the time to be honest with yourself and make the difficult choices.
Do not ignore the emotional factors when making a decision about your financial future. Be brutally honest about your ability to exercise self-control as well as what you will be giving up. If you have an indulgence that is of deep importance to you, being able to have a manicure once a month, a standing dinner date with a group of friends that you would feel lonely and left out without, make room in your plan for this so you don’t end up being frustrated and over spending to make yourself feel better.
The best part about learning to pay off a debt consolidation loan is creating good habits you can use for the future. Whatever the cause of your debt you are now equipped with the knowledge of how to avoid these pitfalls in the future. You have culled excessive spending from your lifestyle, learned to enjoy a social life without pricey nights out, and hopefully determined what luxuries are most important to you. When the loan is paid off you will now see how much additional income you have. Consider meeting with a financial planner to discuss the right balance of saving for emergencies, retirement and special treats. A clean slate is a wonderful opportunity for personal growth.