Debt consolidation allows borrowers to roll multiple old debts into a single new one. Ideally, that new debt has a lower interest rate that makes payments more manageable or lets borrowers pay off the total more quickly.
Many people try debt consolidation, but not all emerge better off.
Some borrowers wind up in worse shape, either because they run up their credit cards again or because their debt remains overwhelming despite the better repayment terms. Others succeed because debt consolidation is part of a bigger plan to gain control over their finances.
So the first step in debt consolidation is simply to consider whether it will actually work for you. In Part 3, I’m going to show you exactly how I made the decision to refinance my credit card debt.
Step 1: Are you ready to rumble?
As in, are you ready to pay off your debt, stop accruing more debt, and is this a long-term solution NOT a band-aid? If yes, proceed. If no, then you probably need to work on your lifestyle and budget first. Moving around debt will not help you.
For me, this was an obvious “yes.” I started a blog, completely overhauled my budget, and went on a spending fast in preparation for paying off my credit card balance ($11,500).
Second, is your debt manageable? I realize we all probably get stressed and sweaty thinking about paying down our debt (it feels insurmountable), but can you realistically pay off this debt in 5 years? If you can definitely pay off the debt in 5 years, maybe with a little hard work on your part, then you can definitely look at refinancing or consolidating the debt.
Note: If your debt is insurmountable, please talk to a debt management/bankruptcy/financial planning expert to help you navigate what to do. You can’t tread water on your own forever, it’s time to reach out for the life saver.
For me, I started this debt journey hoping to pay off my credit card debt in 2 years, so I moved right along with my plan to refinance.
Step 2: Do Your Research
Make sure that consolidating/taking out a 2nd mortgage/refinancing makes financial sense for your loan. This is as simple as looking around at different loan companies and seeing what they offer.
For example, if you want to refinance a credit card with a 14% interest rate, and the company you are researching only offers loan at 14% or higher, then that would not be a good fit for you. OR, if the company has loans starting at $20,000, and you want to refinance $10,000 – then again, not a great fit. There are a lot of companies out there doing debt consolidation so take the time to find one you like.
Many companies will also let you check what your loan terms might be without dinging your credit score – something called a “soft credit check.” If a company does this, use it!
Now is also the time to figure out if you can make life easier all on your own:
- Can you pay off the debt in less than a year? If so, it may not be worth the time and effort to consolidate. You might end up paying a few extra bucks of interest, but probably not much more.
- Can you get a lower interest rate on your current debt just by asking? You can always try calling up your credit card issuers and requesting a lower interest rate. (Unfortunately, my bank couldn’t lower mine since apparently I was already at the lowest offering for my card – but they were very nice!)
If you answered yes to either of those questions, then skip the refinancing and do it yourself! You got this! Remember: refinancing and consolidation are all about making the math work in your favor.
Finally, you’ll need to think about which options are open to you, given your credit history and assets. A long credit history and good credit scores are necessary to qualify for 0% balance transfer credit cards and the best rates on personal loans. You still may be able to find a personal loan even if your credit history isn’t long or good, but you’ll likely pay higher interest. You also can borrow against the equity in your home, a retirement account or a life insurance policy.
For me, I chose a personal loan to refinance my credit card debt.
A personal loan taken from your local bank or credit union or an online lender may give you a lower interest rate on your debt, or help you pay off your debt in a shorter period of time. I liked the fixed installment payments, the lower interest, and the fact that I would definitely have my loan paid off in 2 years! Plus, there’s often no prepayment penalty so I can actively pursue paying off the loan faster.
Step 3: Do the Math
Use online debt repayment calculators to figure out just how much you’ll be saving (or not saving) if you decide to refinance. Make sure that the bottom line is in your favor.
For me, after researching, I decided that Payoff’s loan was probably going to work best for me. Here’s my math:
For a slight decrease in monthly payment, I am now saving over $600. That might not sound like a lot, but think of it this way: that’s an extra monthly payment towards my credit card debt.
Plus, their website is strangely addictive (NOT a real reason to choose a loan company, but it’s a perk). I liked the small print of their loans, the great deal I got, and the fact that their company is designed around making sure your financial health improves because of your new debt repayment strategy. Financial stress is no joke, and I feel like my loan company understands that.
Refinancing my credit card debt was a big step in my debt repayment journey. I’ve stopped using my credit card, and I will not use it again until this debt has been paid off (I keep the account open by occasionally buying gas with it, then paying off the balance). I’ve also stopped doing many of the things that caused the balance to creep up in the first place. My credit card debt payoff goal is July 2017 (or May 2018 at the latest), and I can’t wait!
In Part Four, I’ll be talking about the mental aspects of paying off debt & how to stay the course. Get excited!