4 Common Debt Consolidation Errors and how to avoid them
If you’ve accrued multiple types of debt including medical bills, credit card debt or personal loans, you might want to consider FAQ on debt consolidating.
The process of consolidating the debt to one installment typically through the help of a consolidation loan. This not only reduces the burden of debt but, if are able to get a low rate enough, you’ll lower your interest costs and be able to pay off debt quicker.
It’s a no-brainer isn’t it?
Financial experts believe that debt consolidation could be a wise choice but it’s but not completely safe. Avoid these common mistakes to avoid when consolidating.
Mistake 1: rushing into debt consolidation
In debt is stressful and it’s natural to try to get out of debt as fast as you can. However, doing it too quickly could result in a loss of money.
People with better credit scores typically benefit from less interest charges, especially refinancing. That’s the reason Charles Ho, a California-based certified financial planner and the founder of Legacy Builders Financial, says consumers should consider ways to increase their credit score prior to consolidating.
If he is working with clients that want to consolidate their debts, Ho reviews their credit report and then identifies what he refers to as “fruits to be found” solutions that are quick and have huge payoffs. It could be contesting an error, or scheduling the right amount of payments to cut down on credit use i.e. the amount that you owe on credit cards that are revolving against the total credit you can get from these. Accounts.
According Ho Ho the small tweaks can influence your score in the near term up to 50-100 points. “It’s practically saving dollars due to lower interest rates for consolidation, simply by keeping it for a couple of months,” he says.
Beware of this:Before applying for a debt consolidation service, take a the time to review your credit report and search for ways to improve your credit score quickly. Until April 2022, you can check your credit report with every major credit bureau for free every week using AnnualCreditReport.com.
2. You’ve ignored the root of your debt
Although debt consolidation might seem to be a huge step towards a better future however, it might not be enough to shield you from financial difficulties.
It’s not uncommon for people to become being sucked into recurring debts when they’ve not addressed the root of the problem, according to Pete Klipa, senior vice director of relationships with creditors at the National Foundation for Credit Counseling.
“If one goes through debt consolidation but they don’t completely address the budgeting issues which may have led them there initially Then they’re bound be tempted to slip back into the same trap,” says the expert.
Consolidation may even worsen the root of debt: excessively charging credit cards. Eliminating your current debt from these credit cards via consolidation allows them to be freed up. If you are unable to avoid using them they’ll cause more problems than if you didn’t consolidate at all.
Do not do itSet an annual budget plan that is balanced between your income and expenses while leaving the possibility of an emergency savings account. When you are trying to eliminate the debt, do not finance non-essential purchases.
3. Making the Wrong Choice for Debt Consolidation Loan
Personal loans to consolidate debt can be obtained by borrowers from all over the spectrum of credit which includes those who have bad credit (629 FICO or less).
However, just the fact that a lender might offer you a loan to consolidate debt does not mean you have to consider it.
A debt consolidation loan that is smart is one that comes with an annual percent rate that is less than the rate of interest for your debts. It is also important to pay particular attention to the repayment period. A longer period will result in lower monthly installments but will increase the amount of amount of debt. Determine if you’re able to keep your commitment to making payments over a three or four-year period , and also the other goals you have in mind that could be put off until the debt is paid off.
Beware of this: If you are contemplating the possibility of a debt consolidation loan first, you must plug in your loans into a debt consolidation calculator to calculate the average APR. You’ll want the new APR that is lower. Also, try to find the most affordable repayment terms with monthly installments that you are able to afford.
4. Mistake: Not considering other debt repayment options
It’s not the only option depending on other factors, such as your credit score and your financial situation it’s possible that you’re better off with a different strategy.
Klipa states that credit counseling may provide benefits that a basic debt consolidation service can’t, since clients get individual advice about their financial situation, as well as a strategy to consolidate and eliminate their debt. . This is particularly helpful to clients who require help regarding budgeting.
Another option is borrowing against assets, like an equity loan for homes or a the 401 (k) loans, Ho says. These loans usually are less APRs than an unsecure consolidation loan, particularly for those with bad credit.
But, Ho calls for caution. If you don’t pay back this loan in full, then you may lose the asset, or pay huge tax bills, as well as the negative impact of your credit rating.
Whatever option you decide to go with you prefer, it is essential to create a plan and adhere to the plan by keeping up with your repayments.
“There isn’t any magical pill that can make debt disappear,” Ho says. “We are living in a world which is awash in instant gratification however, with debt, it’s a gradual and organized process.”
Beware of it Find out the various methods to repay your debt, particularly in the case of bad credit. Think about working with a non-profit credit counseling service or a paid-only financial planners for assistance with your financial situation.