4 Tips To Avoid Debt Consolidation Traps.
A debt consolidation loan can help you manage your liabilities better and can potentially improve your credit score in the long term.
However to help out first-timers we came up with 4 tips to avoid debt consolidation traps.
1. Know When To Use Debt Consolidation Loans
Before opting to consolidate your debts, make sure the following criteria are checked:
- The interest rate for the consolidated loan should be lower than the original rates of all your debts combined
- The debt consolidation loan should be more manageable than the original credit products
- The debt consolidation loan should fit your schedule better than the original credit products.
Always remember that you are getting a loan to make your debt more manageable. If it becomes harder to bear, then perhaps an alternative option should be considered.
It is important to assess your current means and your current options before making your final decision.
2. Know Why You Use Debt Consolidation Loans
Debt consolidation loans can help you lower your debt, however, if you have to come to this point, chances are you have been a bit reckless with your spending habits.
Therefore in addition to consolidating your debt, you have to be ready to make the following adjustments:
- If you have multiple credit cards, cancel most of them in order to limit your usage to a single card.
- Save periodically on an emergency fund to provision for sudden expenses.
- Spend your money wisely and try to drastically reduce useless or unplanned expenses
3. Do your Research
Consult a debt consolidation expert and a financial advisor to explore all your options. Engaging with the wrong financial institutions could make you lose time and money.
Keep in mind that in the short term your credit score might slightly decline following the consolidation, but if you pay back your debt in time it will pick back up.
4. Explore all your options
Debt consolidation may not be your only option. As a matter of fact, there are many other alternatives you should consider before resorting to debt consolidation.
Consider the following:
- You could negotiate better terms or a payment plan with the financial institutions you deal with. Some institutions would rather have you pay something than lose the business altogether.
- You could also borrow from friends or family to pay back your debts, then close your accounts and settle your obligations to your new creditors with more flexibility and with a much lower interest rate.
- You could sell some of your belongings to pay your debts
- Again, reduce all your expenses
You can also find out more information on how debt consolidation works at FaceTheRed.com.
That’s all on the 4 Tips To Avoid Debt Consolidation Traps.