4 Keys to Effective Debt Consolidation

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4 Tips to a Effective Debt Consolidation
Set a budget, stop using credit cards and evaluate consolidation alternatives to successfully consolidate your debt.
By Amrita Jayakumar Writer The Washington Post Amrita Jayakumar is a former special assignments journalist for NerdWallet. She also wrote a syndicated column about the financial situation of millennials, and focused on personal loans and consumer credit and debt. Previously, she was a reporter for The Washington Post. Her work was published on The Miami Herald and USAToday. Amrita has a master's diploma in journalistic studies from the University ofMissouri.





Nov 28, 2022


Edited by Kathy Hinson Lead Assigning Editor Personal finances, credit scoring managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in capacities such as chief of the copy desk and team director of design and editing. Prior experience includes copy editing and news for many Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism from The University of Iowa.







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If your personal finances seem to be on the brink, your first instinct might be to make a drastic move. You can freeze your credit cards in a block of ice. Promise to never eat out again. Forgo your Netflix subscription.
These methods can help, but financial experts say is a more complete plan. A common approach is debt consolidation, which involves combining multiple debts into a single loan and credit card at an interest rate that is lower.
"Consolidating debt into one place can be beneficial and empowering in terms of psychological comfort since it feels easy to manage," says Mathew Isaac Associate Professor of Marketing in Seattle University's Albers School of Business and Economics.
However, it isn't a solution that works for everyone.
Consolidation is best suited to high-interest rate debts like credit cards. Households that carried credit card debt had a total of $6,849 and costing an average of $1,162 annual interest, according to an analysis conducted by NerdWallet.
The people whose earnings and expenses aren't enough to resolve debt problems through counseling or consolidation should consider bankruptcy, says John Rao, an attorney at the National Consumer Law Center.
Consolidating debt is only the start of a long process. Here are four key points to help you get it done.
Watch your debts dwindle
Register for an account and link your credit cards, loans and accounts to keep them all in one location.






Make a realistic budget
"In in order to ensure that the consolidation process can be effective it is necessary to have an organized plan of attack," Isaac says.
A allocates money for debt repayment as well as an emergency fund, and contributions to retirement savings but that isn't enough when consolidating, says Lara Lamb, a certified financial planner at California Abacus Wealth Partners. Abacus Wealth Partners.
Successful budgeters avoid adding debt by accounting for the infrequent expenseslike registration fees for cars and seasons when expenses are high, such as the holiday season, Lamb says.
They also leave room for enjoyment.
"People tend to go on a"diet" to spend money and then think they've been able to keep themselves in check for too long, and then go out and splurge," Lamb says. "A realistic budget gives you the funds to invest in items you love and are passionate about."
Quit using your cards
A fundamental rule in consolidation is not using your credit cards to pay off your debt.
People cut up their cards, secure them or put the cards in ice, strategies which may seem extreme, but experts say can be successful. These strategies are often referred to as "commitment devices" and aid people in achieving the long-term objectives, says Rebecca Rouse, director of the Financial Inclusion Program at Innovations for Poverty Action which is a nonprofit organization that has conducted studies on the repayment of debt.
To stay committed, write down why you'd like to be debt-free, and how often you will make payments, and set reminders on a regular basis to monitor your progress, Rouse says.
Afraid of losing your card doesn't mean closing accounts which can harm your credit score. The only exception to the rule of no-use is a nominal charge on your card every few months, paid at the time, and fully -- to keep the account in good standing and your credit safe, says Shawn Tydlaska, a certified financial planner at California firm Ballast Point Financial Planning.
Compare products from consolidation
They allow you to transfer the debts of other cards and do not charge interest for a limited time The best cards offer from 15 to 21 months -- after which a double-digit interest rate is triggered. The majority of cards have fees for balance transfers and require good credit scores and high incomes to qualify.
To improve your chances of being approved, add up all potential sources of income -- including the savings account as well as 401(k) -and include that amount when you apply, but not just your earnings, Tydlaska says.
typically come with low interest rates than credit cards and you can borrow more money. Rates will depend on your credit score and how much debt you have. A lender that pays cash directly to your creditors will eliminate the incentive to spend the cash instead of making use of it to pay off the debt. Only a few lenders -- such as Wells Fargo, Discover and FreedomPlus -- offer this option.
>> MORE:
Get support from others for your cause
Debt can be viewed as a shameful topic, but peer support is an effective motivator that can help people be accountable, as per Isaac and Rouse.
Groups for support with debts, online forums or a close family member can help you stay on track to achieve your goal. Online lenders such as Payoff and Prosper can provide specific recommendations or apps to motivate borrowers.



About the author: Amrita Jayakumar is a former writer for NerdWallet. She previously worked at The Washington Post and the Miami Herald.







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