Advertising
Advertising

Published on August 28, 2020

10 Recession-Proof Debt Consolidation Tips

10 Recession-Proof Debt Consolidation Tips

The journey to paying down your debt can be challenging in the best of times. It can be even more complicated when you’re balancing the effects of a global recession.

Many Americans are facing immediate financial uncertainty from losing their jobs or being underemployed. The economic repercussions of this pandemic recession will be felt for years to come. Although becoming debt-free might not be your top priority during this difficult phase, you should still take steps to maximize your money.

Here are some debt consolidation tips to help recession-proof your finances.

1. Ask Your Creditors to Lower Your Interest Rates

The first on this list of debt consolidation tips is asking your creditors to lower your interest rates. Many borrowers don’t realize they can contact their existing credit card providers at any time to request a lower interest rate.

This often-overlooked tactic is a quick and easy way to reduce your debt burden, and it may result in a permanent or temporary (e.g. 12 months) interest rate reduction.

Creditors are more likely to say “yes” if you have a history of on-time payments or if your credit score has recently increased. Even if that’s not the case, the worst thing your creditor can do is say “no.”

If you aren’t successful in lowering your interest rate, don’t hesitate to ask again after a few months or after receiving lower offers from competitors. Credit card providers can issue reductions at their discretion, but it’s up to you to initiate the request.

2. Pause Low-Interest Loans to Tackle High-Interest Debt

High-interest loans and credit cards can prevent you from climbing out of debt. Although you’re hard at work making payments, interest charges are continuously accruing. This interest can quickly eat away at your monthly payment instead of chipping away at the principal balance.

To help make some headway in repaying your debt, see if you can pause payments on your lower interest loans. Then, devote those funds to your higher-interest debt. This lets you eliminate your balance faster and save you from unnecessary interest charges.

Advertising

Options for loan deferment vary by lender. In some cases, lenders might offer an interest-free deferment. Other lenders might continue charging interest on your loan during deferment.

Contact your lender to determine if deferment is available and for how long. Even a pause of two to three months can help you put a noticeable dent in your high-interest debt.

3. Consider Using a Balance Transfer Credit Card

You can quickly reduce your overall interest by taking advantage of low or 0% APR balance transfer credit cards. By transferring your existing balance from a higher interest card, you can save money and pay down your balance quicker.

A low-interest rate or promotional offer, however, might come with an additional cost in the form of a balance transfer fee.

For example, a creditor might offer 18 months of 0% APR when transferring a balance from another card. This perk typically comes with a 3-5% balance transfer fee that’s calculated based on the transfer amount. In this scenario, you could tack on up to $300 to $500 in transfer fees if you transfer an existing $10,000 balance to a new card. You’ll need to weigh your potential savings versus the transfer fee to determine if this is a good debt consolidation strategy.

Additionally, your new card might have transfer limits or a short introductory period before a higher interest rate kicks in on any remaining balance. Be sure to read the fine print and stick to your repayment strategy, so it doesn’t end up costing you more in the end.

4. Refinance With a Lower Interest Rate

Whether it’s your mortgage, student loans, auto, or other consumer debt, you might find a lower interest rate by refinancing your loan. Refinancing is one of the most helpful debt consolidation tips you should know.

Refinancing replaces your existing loan with a new loan—usually with a lower interest rate or better terms. You might qualify for a better rate than when you originally took out the loan if your credit score has since improved or if consumer loan rates have dropped.

Mortgage and student loan refinancing rates are at record lows since this pandemic began, which is a small silver lining in otherwise tragic health and economic crisis.

Advertising

The bottom line is if you can find a lower interest rate for any of your loans, take action. Remember, there might be associated refinancing fees or closing costs depending on the type of loan and lender.

5. Ask About Loan Modification

In some cases, you can benefit from modifying an existing loan instead of refinancing it into a new loan—particularly if you need immediate relief due to financial hardship.

Depending on the type of loan, the refinancing process can take months, as is the case with some mortgage refinancing options. Loan modifications, however, can be processed in a short period.

Loan modification can make your payment more manageable by reducing your interest rate or lowering your monthly payment. It can also extend your loan terms, which typically costs you more money in the long-run.

Contact your lender to explore loan modification opportunities. Always make sure you fully understand the terms and structure of your modified loan before moving forward.

6. Shop Around for the Best Loan Consolidation Quotes

If you have high-interest debt, you may be able to consolidate multiple balances into one low-interest loan. This can save you on interest fees, but it can also streamline your payments into one due date, which can prevent missed or late payments.

It’s best to grab quotes from at least three lenders any time you’re consolidating or refinancing your debt. By comparing multiple offers, you’re getting the best current rate since lenders are competing for your business. I recommend shopping around for all types of loans, especially for better student loan rates.

Student loan debt, totaling more than $1.64 trillion in both federal and private student loans, surpasses all other forms of debt in the U.S. apart from housing debt.[1] Because of this, there are plenty of opportunities to refinance or consolidate your student loans.

If you already have private student loans, you should be shopping around for better interest rates at least once per year. Lowering your interest rate is the priority, but also compare origination fees, repayment terms, and any available cashback offers to pay down your debt further.

Advertising

If you have federal student loans, the decision gets more complicated. Depending on your financial situation and career goals, it might be more advantageous to keep your existing federal student loans due to their various protections (e.g. deferment and forbearance), flexible income-driven repayment plans, and available forgiveness programs.

7. Work on Improving Your Credit Score

Before consolidating a large amount of debt, take steps to improve your credit score. The higher your credit score, the better interest rates you’ll be offered.

Common ways to improve your credit score include:

  • Disputing any errors or outdated information on your credit report
  • Paying off smaller credit cards and keeping your loan balances low
  • Refraining from applying for new credit accounts in a short period
  • Keeping revolving credit accounts active

These actions can help lower your credit utilization rate while maintaining your credit history length. Both are important factors in determining your credit score.

8. Cancel Any Small Credit Cards After You Consolidate Debt

Another often overlooked debt consolidation tip is canceling small credit cards. If you use a debt management program or a debt consolidation loan, you might be required to close certain credit card accounts as part of the agreement. This gives the lender more confidence that you won’t run up new balances and increases the likelihood that you’ll repay the debt.

Even if you choose a different method of consolidation, it’s a good idea to cancel your smaller or newer credit cards by choice—or cut them up—to discourage you from using them.

9. Run a Credit Check to See If You Forgot About Any Debt

With endless opportunities to borrow money, payments can slip through the cracks. Check your credit report periodically to ensure you haven’t forgotten about a small loan or debt.

For example, you may find that a medical bill has been sent to collections without ever physically receiving a notice because it was sent to a previous or incorrect address. Perhaps you simply forgot about a loan that has an old email on file. You could be in default without realizing it.

You’re entitled to one free copy of your credit report from each of the major credit reporting companies—Equifax, Experian, and TransUnion—every 12 months.

Advertising

By keeping an eye on your credit report, you can head off any surprises and actively resolve any financial issues that arise.

10. Sign Up for a Budget-Tracking Service

An often overlooked debt consolidation tip is signing up for a budget tracking service. It’s easy to become detached from your money when you’re swiping your credit card instead of paying with cash. This psychological separation leads to overspending and more debt.

Free and paid budgeting tools can help you reconnect with your finances and keep you accountable along your journey. Platforms, like Mint or You Need A Budget (YNAB), can help track your expenses and give you a big picture view of your finances.

There are many free and paid budgeting tools out there, so find one that matches your financial needs and goals.

Debt Consolidation Efforts Won’t Solve All of Your Problems

Although these debt consolidation tips can help you save on interest and streamline your debt payoff strategy, it’s only one piece of the financial puzzle. If you’re spending more than you’re earning, you’ll continue to get trapped in the debt cycle.

Start by setting a realistic budget, which might include significant lifestyle changes. You might need to trim down some of your expenses or find a way to bring in additional income. By relying less on credit to make ends meet, you’ll reduce the likelihood of repeating the debt cycle.

More Tips for Better Financial Management

Featured photo credit: Sharon McCutcheon via unsplash.com

Reference

More by this author

Travis Hornsby

Founder & CFA, Student Loan Planner

10 Recession-Proof Debt Consolidation Tips What Is a Good Credit Score (And How to Get One)

Trending in Money

1 How To Pay Off Credit Card Debt Fast: 7 Powerful Tips 2 How To Make a Million Dollars in 7 Steps 3 7 Cheap but Powerful Products That Can Help Your Waste Less Food and Save Money 4 How To Retire Early (And What To Consider Before You Do) 5 How To Create a Budget (The Complete Beginners’ Guide)

Read Next

Advertising
Advertising
Advertising

Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

Advertising

You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

Advertising

Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

Advertising

Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

Advertising

There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

Read Next