Common Debt Consolidation Mistakes
Debt consolidation can offer many benefits including lower interest rates, fixed payment plans, and better financial organization. However, they can prove more troublesome for compulsive spenders and those who struggle to stick to payment plans. Here are some common missteps in debt consolidation to avoid:
Not Researching Your Credit Score Before
Interest rates are often highly dependent on your credit score. Take some time before applying for the loan you’ll use to consolidate debt to research ways to boost credit scores. Things like increasing the credit limit, knowing when your issuer reports payment history and paying twice in a cycle, and being vigilant about checking credit history for mistakes, are steps that could benefit you based on your spending habits.
When consolidating debt, it’s possible that payment plans will offer a lower monthly payment. Do not take this as an opportunity to increase spending in other areas of your life. In fact, putting any extra money toward that loan repayment cuts time off the plan, and saves you money in interest payments. Remember: the repayment plan is a monthly minimum, and any surplus paid toward the loan benefits you in the long run!
If your debt problems don’t stem from poor spending habits, closing all lines of credit with your consolidation could be a big mistake. Having a card with a zero or low balance that is paid off immediately ultimately helps grow your credit score. Keeping an open card in the drawer shows you can spend responsibly and positively impact your credit.
Oftentimes, debt spirals out of control when an emergency cost forces you to put the charge on a credit card. Getting stuck in the cycle of paying back the debt plus interest can make you short-sighted. Use the lower monthly payments as an opportunity to start an emergency fund and avoid repeating the mistake in the future.
Preparing for a healthy financial future when you have debt begins today. Practicing healthy spending habits and consulting a financial expert is a great way to set yourself up for financial success.