Being in debt is a stressful state. When the bills start to pile up, due dates are missed and creditors start calling, it's easy to feel overwhelmed. If this sounds familiar, you may have wondered if there was a way to take control over your debt repayment plan.
Many people in this situation benefit from a debt consolidation loan. This is a loan that will help you manage your various debts because it brings them all into one payment. Debt.org explained debt consolidation loans are personal loans used to pay down your current debts . Once these are taken care of, the loan is the only debt you have left to pay.
While it might seem like an easy fix, especially for someone struggling with their current debt management strategy, there are right ways and wrong ways to go about consolidating debt.
The right path
First, you should determine if it's right for you. ReadyForZero explained this technique benefits people who :
- Have trouble keeping track of multiple due dates throughout the month
- Need a lower minimum payment on their debt to avoid late payments
- Have high interest, high balance debts
If any or all of these sound like you, a debt consolidation loan might be a step in the right direction. If your debt load is more comprised of low-interest or low-balance debts, consolidation might not be as effective.
Managing your financial future
If you decide to take out a debt consolidation loan, it's important that you ensure your debt doesn't return after the loan is paid off. The first place you need to start this is while you're repaying the loan. Going into debt during this period can really hurt financially. Even though your previous debts will be paid down, you will have another growing debt load to tackle.
One way to ensure this doesn't happen, especially if some of your debt originated on credit cards, is to completely stop using your cards. Instead, open a checking account to pay your monthly necessities with. Use a debit card to manage these finances. If you need to, cancel your cards, completely remove them from your wallet or cut them up and throw them away once they are paid off.
Even after the loan is paid, you should continue to only use credit cards sparingly. A good rule of thumb is to only use credit cards in emergency situations. That way, expenses should be few and far between, making them much easier to pay off.
Avoid sliding back into debt
After your debt is paid down, it's a good idea to build some positive money habits that will stop you from facing debt again. A tried and true method of keeping your finances in order is budgeting.
Budgeting is important because it helps you to understand the weight of each purchase you make. It also helps you to organize your bills and payments throughout the month.
CreditCards.com explained neglecting to form a budget or a financial plan is what causes many people to slide back into debt . The best way to combat this is to create a budget.
"When you need new tires or your washing machine goes, your instinct will be to charge these expenses," Kathryn Bossler, a Chicago-based financial counselor at Green Path Debt Solutions, explained. "That's a sign you could get yourself in trouble again...A budget is such a simple, basic concept, but it's so powerful. It's the way you learn to live within your means."
To create a budget, you will have to determine how much you make each month. Then, calculate your monthly necessities, including:
- Rent or mortgage
- Car payments and expenses, like gas money, insurance and oil changes
- Other debts not included in your debt consolidation loan
Subtract how much you expect to spend each month from how much income you will take home. Be sure to stay within your means on each of these. Fixed expenses are easy to keep track of, but it's easy to let a trip to the grocery store become more costly than you planned, throwing off your budget for the month.
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