If you’re making your current debt payments on time, you can likely qualify for a balance transfer credit card or loan at a decent rate. But remember, debt consolidation isn’t for everyone.
A new loan can temporarily ding your credit score, so shop around for the best rates. And don’t forget to focus on other ways to increase your income, like a side hustle.
Get to the Bottom of Why You’re in Debt
Taking on new debt in the form of a personal loan, balance transfer credit card or home equity loan can negatively impact your credit. But it may not be a deal breaker if you’re able to keep up with your debt payments and have enough good credit to qualify for a low-cost loan.
In addition to the pros and cons of debt consolidation, you should also make sure you understand why you’re in debt. If you’re accruing debt because of spending more than you’re earning, a debt consolidation loan or other method won’t get you out of it unless you make a plan to change how you spend for the long term. That includes setting a budget. Jackie Veling covers personal loans for NerdWallet. She’s previously written for The Associated Press, the Miami Herald and the Washington Post.
Make a Budget
If you want to start managing your money better, the first step is to make a budget. This will help you understand where your money is going, so you can make smarter choices about spending and saving.
Start by listing your income sources and then tracking expenses for a month or so (or more, depending on your situation). Use an app, budgeting spreadsheet or online template to get the job done. It’s best to be as detailed as possible to see where the money is going, and then categorize each category, such as utilities, food and entertainment.
Next, list all of your debt payments, such as mortgage, auto loans and credit card balances. Now you’ll have a clear picture of your needs and wants.
Target Your High-Interest Debt First
In many cases, it makes sense to prioritize paying off debt with high interest rates first. This approach, known as the debt avalanche method, can save money by limiting the amount of time you spend paying off interest charges. You can use a debt consolidation loan or balance transfer credit card to pay off your high-interest debt. A home equity loan or a personal secured loan may also work, but you will need to meet the lender’s income and creditworthiness standards to qualify for those types of loans.
Be aware that refinancing your debt into a new loan can impact your length of credit history, which makes up 15% of your FICO Score. It can also affect your credit
utilization ratio, which accounts for 30% of your score.
Set Small Goals
Many people choose to consolidate debt because it can make paying off their balances easier. This can be done by rolling multiple balances into a single loan or credit card with one monthly payment.
This can be effective, especially if you choose to work with a credit counselor who can help you create a repayment plan that fits your budget. But you also need to be committed to making consistent, on-time payments.
Missing or late payments can hurt your credit score and could ultimately thwart any progress you’ve made. Plus, if you’re not working to address the root causes of your spending habits, debt consolidation may not be the best choice for you. For help with credit or if you are seeking bankruptcy protection, consult a York PA bankruptcy attorney for more help.