When your personal finances are on the brink, your first instinct may be to do something drastic. Freeze your credit cards in a block of ice. Make a vow never to eat out again. Cancel your Netflix subscription.
These tactics can help, but financial experts say paying off debt requires a more comprehensive plan. A common strategy is Ohio Debt Consolidation, which involves consolidating multiple debts into a single loan or credit card at a lower interest rate.
“Consolidating debt in one place can be psychologically stimulating and helpful because it seems manageable,” says Mathew Isaac, associate professor of marketing at the Albers School of Business and Economics at Seattle University. .
But debt consolidation is not for everyone Ohio Debt Consolidation
Consolidation works best for high interest rate debt such as credit cards. According to an annual study by NerdWallet, a personal finance website, households that had incurred credit card debt last year had an average balance of $ 16,748.
People whose income and expenses do not allow them to solve their debt problems through consolidation or credit counseling should consider bankruptcy, says John Rao, an attorney at the National Consumer Law Center.
Consolidating your debt is just the start of a long process. Here are four keys to make it work.
MAKE A REALISTIC BUDGET
“For consolidation to work well, there has to be a clear plan of attack,” says Isaac.
A core budget allocates money for debt repayment, an emergency fund and contributions to retirement savings, but that’s not enough when consolidating, says Lara Lamb, certified financial planner at California-based Abacus Wealth Partners.
Successful budgetists avoid going into debt by factoring in infrequent expenses, such as car registration fees, as well as high spending times of the year, such as vacations, Lamb says.
They also leave room for pleasure.
“People are going to ‘diet’ spend and then feel like they’ve held back for so long that they go out and splurge,” Lamb says. “A realistic budget gives you enough to spend on the things you enjoy and love. ”
STOP USING YOUR CARDS
A cardinal rule of consolidation is not to use your credit cards when paying off your debt.
People slice up their cards, put them in ice or freeze them in ice – methods that seem extreme but experts say can be effective. Such tactics are known as “engagement devices” and help people achieve their long-term goals, says Rebecca Rouse, director of the financial inclusion program at Innovations for Poverty Action, a non-profit organization. who conducted research on debt repayment.
To stay engaged, write down why you want to be debt free and how often you’ll be making payments, and set periodic reminders to check on your progress, Rouse says.
Locking cards doesn’t mean closing accounts, which could hurt your credit. The only exception to the no-use rule is a face charge on your card every few months – paid on time and in full – to keep the account active and your credit intact, says Shawn Tydlaska, a certified financial planner with the company. Californian Ballast Point. Financial planning.
COMPARE CONSOLIDATION PRODUCTS
Balance transfer cards allow you to transfer debt from other cards and charge no interest for a limited time – the best offer 15 to 21 months – after which a double-digit interest rate kicks in. Most cards charge a balance transfer fee and require good credit scores and high income to qualify.
To improve your odds of getting one, add up all the potential sources of income – including your savings account money and 401 (k) – and include that total on your application, not just your salary, says Tydlaska. .
Personal debt consolidation loans usually have lower interest rates than credit cards, and you can borrow more money. The rates depend on your credit profile and the amount of your debt. A lender who sends money directly to your creditors can eliminate the temptation to spend that money instead of using it to pay off debt. Only a handful of lenders, including Wells Fargo, Discover, and FreedomPlus, offer this option.
REGISTER MORAL SUPPORT FOR YOUR GOAL
Debt may seem like a shameful topic, but peer support is a powerful motivator and can empower people, say Isaac and Rouse.
Debt support groups, online forums, or a close family member can help you reach your goal. Even online lenders, such as Payoff and Prosper, offer personalized recommendations or apps to motivate borrowers.
Financial experts say paying off debt requires a comprehensive plan. A common strategy is debt consolidation, which involves consolidating multiple debts into a single loan or credit card at a lower interest rate. But debt consolidation is not for everyone.
This article was provided to The Associated Press by the NerdWallet personal finance website. JOIN Amrita Jayakumar At [email protected] or on Twitter @ajbombay.