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.
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.
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. 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.
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.
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
- 7 Simple Steps to Improve Your Financial Management Skills
- 5 Tips to Overcome a Financial Crisis
- Top 10 Highly Useful Websites to Learn About Personal Finance for Free
Featured photo credit: Sharon McCutcheon via unsplash.com
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