Debt consolidation loan could help you avoid bankruptcy. Essentially, it means taking one big loan to repay all your debts and loans. The new loan will have more favorable interest rate and monthly repayment system and it will be the only loan you will have to deal with. Sounds just perfect for you, right?
If you have ended up with too many debts to repay without any chance of repaying them any time soon, debt consolidation may be your way out.
Well, it could be a huge mistake if you rush into it without fully understanding how this loan works. Otherwise, you will find yourself in a similar situation like before very soon. So, take time to get to know all the possible mistakes you can make before you start following the new financial plan.
How did you actually get yourself in this situation?
The biggest mistake of all is failing to grasp how you ended up with so many debts in the first place. If you don’t work on this step first and realize what you have done wrong, you are bound to wind up in the same situation you’re trying to deal with now.
The point is to take a close look at how you get here and change your habits. Identify your weak sides and your triggers – are you an impulsive online shopper or do you use your credit card for lunches in restaurants too often? Comb through your bills and receipts to understand what the biggest problem is and where most of your money went. The moment you notice the negative pattern, make a clear plan and learn how to stay disciplined and not go down the same road. Otherwise, all your trouble and hard work with the credit card consolidation will be just a Band-Aid.
When you’re done with this step, move on to learning about the possible mistakes you could make when consolidating your credit card debt.
1. Missing to evaluate credit reports
The first thing to do before applying for a credit consolidation loan is to thoroughly check all your credit reports. It could be difficult for you to get a loan if there are numerous errors and debts in them. So, check the reports and contact the credit reporting agencies if you notice any inconsistencies.
2. Missing to consolidate high-interest debts
Don’t simply use the balance transfer method to consolidate all your credit card loans into one card. If you transfer only the balances of several cards with a high-interest rate into another one that has a low-interest rate and don’t do the same with other cards, you’ll get yourself in trouble. Firstly, you’ll have to pay for the consolidated cards, and secondly, you will have to pay for the others that you left out, too.
3. Missing to check the company’s credibility
Don’t go for the first credit consolidation company that you stumble upon. It’s necessary to check the company’s legitimacy from several reliable sources before you start doing business with them – you need to be sure it isn’t a scam. Also, check several companies to compare their terms before you make the final decision. You should do a detailed market research to find the best loans. If you don’t compare different loans, you won’t know which one best suits your financial situation and where can you get the most benefit.
4. Choosing the wrong option
You need to choose the option that is in accordance with your budget and affordability. Get to know all the pros and cons before you make the final decision. You won’t to take it back once you realize your mistake.
5. Not being careful with longer terms
If you get a consolidation loan with longer terms, you can also get lower monthly payments. So, the more time you have before the loan needs to be completely repaid, the lower the amount of money you’ll have to pay each month. You need to have in mind that what you are doing is trying to save money each month to get rid of the debt.
6. Consolidating the wrong debts
High-interest loans are the ones you should be repaying through debt consolidation. So, don’t bother to consolidate the low-interest rates. Or at least consolidate the high-interest loans first, and let the low-interest ones be the last ones to deal with. It’s important to know that student loans belong to the category of low-interest loans, meaning it’s possible to use a credit card with a zero percent balance transfer.
7. Forgetting you still own the same amount of money
Debt consolidation makes it easier to get rid of the debt, but don’t be fooled: you still need to repay the same amount of money as before. So, don’t get too relaxed and try to speed up the process of getting rid of the debt. Maybe a part-time job could help it or cutting back some of the expenses you have. Of course, don’t stretch yourself too much, but try to find the ways in which you could be done with the debt in a shorter period of time. It’s not the time to think that everything will work out on its own.
8. Failing to choose the right debt management program
Debt consolidation isn’t your only option to deal with your debts. It’s good to compare it with other potential solutions at your disposal, including:
Debt settlement – with the help of a credit counselor, you come up with the amount of money you can deposit on monthly basis, while the debt settlement company discusses with your creditors on a payment settlement.
Credit counseling – as in most cases many debts come from poor spending habits, you can consult a credit counselor on creating a payment strategy and a budget to get rid od the debt.
Bankruptcy – of course, this is the last option, which will be recommended by the counselor as a fresh start.
Still, in the majority of cases, debt consolidation through a good loan is your best possible option to opt for.
9. Closing down all accounts at once
When you transfer all your balances in one account, don’t immediately close all the other accounts with zero balances. If you close them all at once, except just the one, it could easily significantly lower your credit limit. Consequently, it will reflect poorly on your credit score.
10. Not sticking to the program
By choosing debt consolidation, it doesn’t mean you don’t have to repay under specific conditions. Not doing it will result in damaging your credit score, and that’s something banks and financial institutions won’t take lightly in the years to come. Once you have made the decision and find the best loan for you, take your time to make a plan that you will stick to. This is why you need to be 100% sure you will be able to go with the plan until the end – make sure you are eligible for a specific program and you will be able to stick to it.
11. Going the same path after getting rid of the debt
You need to look at debt consolidation as a tool that helps you to effectively manage your debts. Many people get excited when they realize their credit cards that were maxed out now are available again for them to use. So, they go along the same path – they start buying things they can’t actually afford. And they are on their way to ending up in yet another financial crisis.
Be careful not to fall into this trap. Don’t start reloading your debts. It’s best if you close most of your credit cards. Stick to just one card that’s really necessary and has a very low limit. Lastly, use this card only in emergencies.
It’s not enough just to be careful about avoiding the mistakes listed here. You also need to start spending far more economically than before. Every month, you will have to have a certain amount of money ready to pay the loan rate and your monthly bills. Remember, always be cautious because one error could cost you a lot. Debt consolidation can be very helpful but only if you act accordingly.