If you’re drowning in a sea of credit card bills and on a first name basis with debt collectors, you may want to consider securing a debt consolidation loan. With debt consolidation, you take out a new loan to pay off existing payments owed. You’ll save money on interest (these loans typically have lower interest rates than other types of debt) and simplify your bill payments each month. However, if you’re not careful, debt consolidation can backfire.
Here are 3 debt consolidation mistakes you should avoid:
1. Not fixing poor spending habits
Debt consolidation for bad credit is possible. But first you’ll need to focus on fixing the spending habits that landed you in hot water in the first place. Take a close and honest look at your spending habits. Do you go online shopping when you’re stressed? Take one too many Ubers when you should be relying more on public transit?
The only way debt consolidation will work is if you limit your credit use and start saving instead of spending. Because you’re taking your various debts and putting them into a new loan, you’re freeing up more of your funds. If you keep spending like it’s going out of style, you’ll wind up in a deeper financial hole.
2. Not doing your research ahead of time
Finding the right debt consolidation loan requires some research. You won’t be doing yourself any favors if you just go with the first loan you see. For example, make sure that the new loan you’re taking on has a lower interest rate than what you’re currently paying. If not, you could wind up paying even more. You should also take some time to do research and verify the consolidation companies you’re considering. Make sure they’re legitimate and read the fine print to avoid being scammed.
3. Not creating a clear plan to pay off debt
You’re in for a rude awakening if you expect your new loan to do the hard work for you. Having a clear payment roadmap can ensure your debt consolidation success. Here are a few suggestions to help you get debt-free:
- Create a realistic budget: Sit down, crunch the numbers, and make a monthly budget you can stick to. Better yet, automate your payments so there’s no chance you’ll accidentally miss one.
- Get a side job if necessary: If you need some extra cash to help make your new payment, look into a side hustle like freelance work or selling items on Ebay.
- Set a deadline: If you take your sweet time making payments (read: just the minimum monthly amount), your principal amount doesn’t go down and you’ll continue to pay interest. Make it a priority to pay off your outstanding debt ASAP to minimize the interest you owe.