Tame your debt
Key steps to successful debt consolidation
When your personal finances teeter on the brink, your first instinct might be to do something drastic. Freeze your credit cards in a block of ice. Vow to never eat out again. Forgo your Netflix subscription.
These tactics may help, but financial experts say paying off debt requires a more comprehensive plan. One common strategy is debt consolidation, rolling multiple debts into a single loan or credit card at a lower interest rate.
Here are key steps to making it work.
1 Make a realistic budget
A basic budget allocates money for debt payments, an emergency fund and contributions to retirement savings, but that isn’ t enough when consolidating, says Lara Lamb, a certified financial planner at California firm Abacus Wealth Partners.
Successful budgeters avoid adding debt by accounting for infrequent expenses, such as car registration fees, as well as times of the year when expenses run high, like the holidays, Lamb says. is not using your credit cards as you pay off debt.
People cut up their cards, lock them away or freeze them in ice, methods that seem extreme but experts say can be effective.
Such tactics are known as “commitment devices” and help people achieve long-term goals, says Rebecca Rouse, director of the Financial Inclusion Program at Innovations for Poverty Action, a nonprofit that has conducted research on debt repayment.
3 Compare consolidation products
Balance transfer cards let you shift over debts from other cards and charge no interest for a limited time, after which a double-digit interest rate kicks in. Most cards charge balance transfer fees and require good credit scores and high incomes to qualify.
To improve your chances of getting one, add up all potential sources of income and list that total on your application, not just your salary.
Personal loans for debt consolidation typically come with lower interest rates than credit cards, and you can borrow more money. Rates depend on your credit profile and how much debt you have.