Americans are again sinking deep into debts and jeopardizing their financial wellness. Interest rates are expected to continue to rise so things are getting doubly difficult. Even an increase by a quarter percent could be costing the average American household as much as hundreds of dollars as additional interest. Thanks to the high rate of interest debts are spiraling out of control as such, many people are turning to debt consolidation as the perfect solution. However, you need to focus on avoiding some of the common debt consolidation mistakes to prevent your financial situation from getting worse.
What Do You Understand by Debt Consolidation?
If you wish to steer clear of bankruptcy, it is best to opt for an effective debt consolidation loan. Debt consolidation implies taking out a loan for repaying your multiple outstanding debts or loans. The debt consolidation loan would be having a lower-interest rate and you would simply need to make only one single monthly repayment. So you no longer would be overwhelmed juggling multiple outstanding bills and loans.
Debt consolidation could be streamlining your debts and assist you in saving money. This process entails taking out a personal loan for repaying multiple debts including your medical, credit card, or retail store outstanding bills and debts. You would be using your debt consolidation loan for paying off your already existing debts. Going forward there would be just one monthly payment, one interest rate, and one due date to keep in mind. Remember debt consolidation loans would be offering lower-interest rates as compared to any other form of debt particularly credit cards. Thanks to the lower interest rates you could save a great deal of money throughout the loan term and eliminate debts faster. You must examine the debt consolidation or debt settlement ratings online to look for reliable and reputed debt relief partners.
Credit Card Debt Consolidation Mistakes
Even though debt consolidation loans could prove to be useful, it is essential to chalk out an effective plan before going ahead otherwise, there would be more debts as compared to when you had started. Here are some of the common mistakes and ways to resolve the associated issues.
Mistake: There Is No Budget
If you opt for debt consolidation without having a proper budget, you would end up nose-diving into debts again. You need to generate a well-thought-out budget so that you could keep track of how much money comes in or goes out and where. The absence of a proper budget would mean you are left susceptible to some risky spending decisions that trigger more debts over time. A budget would help you realize the root causes of your overpowering debts. For instance, you may understand that you are overspending on eating out. Just by making certain lifestyle modifications such as in this case, cooking regularly at home could help in cutting down your spending unnecessarily on outside food. This should be freeing up substantial money to maintain a steady debt repayment schedule.
Rectification: You must get into the habit of writing down and keeping a record of whatever money you earn every month. Maintain a comprehensive list of your expenses and that may include utilities, rent, student loan payments, car payments, subscriptions, and credit card bills. Your income must be more as compared to your spending otherwise; you need to boost your earnings for balancing your budget. Once you have created a firm budget, you need to religiously stick to the budget to stay on the right track to debt repayment and freedom from overwhelming debts.
Mistake: There is No Emergency Fund
When you are too committed to paying down your debt, you would be absolutely laser-focused on promptly paying off your outstanding debts and balances and ignoring savings. However, it is mandatory to create an emergency fund to take care of exigencies. An emergency fund could act as a preventive for a credit card debt in the future. Without an emergency fund, you would again start depending on your credit cards for taking care of all your unanticipated and sudden expenses such as repairs and medical bills. So the vicious cycle of debt and even more debts would start again.
As per https://www.forbes.com, “First, you have to find a way to make sure you’re spending less than you make each pay period while also setting aside an amount each month to build up that emergency fund.”
Rectification: Even when you are consistently paying off the debts as per the schedule, you should try to keep aside some money towards your emergency fund every month. It may seem unrealistic to save up to six months of expenses but remember it could be a great idea if you manage to save only a few hundred dollars because that could safeguard you from turning to credit card debts again. You may consider putting in some more savings every month and boost your emergency fund and get ready to face the challenge.
No Debt Pay Off Plan
You cannot simply consolidate your existing debts and go on making all the minimum payments because that is not all. You need to chalk out a concrete plan of action otherwise you would be going back to the deep dark hole of debts again.
Rectification: Chalk out an effective debt payoff plan that should be working perfectly for you. If your income seems to be not high enough for keeping up with outstanding bills and various loan payments, you must come up with highly-creative solutions such as curb your spending, do a side job such as delivering groceries, babysitting or walking dogs etc., to generate more income to dedicate to debt repayment. Bring about certain lifestyle modifications after identifying the root cause of your messy financial state.
Credit card debt consolidation could prove to be a precious tool for effectively managing your debt. However, as discussed earlier, it is more important to specifically address the core causes of reckless spending habits. If you plan to opt for debt consolidation, you must consider reviewing offers from numerous other debt consolidation lenders for ensuring the best loan terms and best rates.