Debt Consolidation – “Made by Yourself”
You do not have to hire a company or a specialist to help you with a debt consolidation. Not all debt relief options require that you hire a specialist or enroll in a program through a company. In the right financial circumstances, you may be able to use a do-it-yourself option to achieve a debt consolidation that addresses your debt problems personally. However, you have to be careful when using one of these options; If you are not careful, you can make your financial distress worse.
Doing debt consolidation for yourself is not for everyone. If you review the options below and think you will not succeed on your own, call us. A certified credit counselor will review your situation for free and help you choose the right path. If you prefer, you can start online with a request for a Free Debt Analysis and a counselor will contact you shortly.
Self-Made Consolidation – Option # 1: Balance Transfer
Your first option for a self-made debt consolidation is a balance transfer. You take the balance of one or more of your high interest credit cards and transfer them to a card with a much lower interest rate. You can combine multiple credit card debts into a single credit card with significantly lower interest, so you only pay one account each month which is usually much less than what you would pay by adding up those of the other debts.
To make a successful balance transfer, you need to have a solid credit rating, enough to qualify for a credit card to transfer the balances. If you have extremely strong credit accounts, then you will even be able to apply for a card that offers 0% APR in balance transfers during an introductory period. This allows you to reduce the balance of your debt quickly, since 100% of the payments you make will go towards repaying the principal debt instead of a large part of the accrued interest.
There are two common mistakes you should avoid if you are using this as a debt relief option:
If you do not have good credit, you will not qualify for an interest rate that is low enough to provide a benefit. If the interest rate is too high, it can really make your debt problems worse. If you have bad credit or even very tight credit, you may have to consider other options for debt relief.
You must commit to avoid the credit until you pay the amount of the transferred debt in full. With zero balances on your other credit cards, you will be tempted to start spending on credit. However, if you start accumulating the debt of high interest credit cards before you have fully paid off the transferred debt, you are only increasing your debt load instead of decreasing it, thus making your situation worse. .
Self-Made Consolidation – Option # 2: Unsecured Debt Consolidation Loan
Another do-it-yourself debt consolidation option is consolidating your credit card debt by requesting a personal loan or unsecured loan and using the money to pay off your high interest credit cards. With the credit cards paid, the only debt you will have to pay each month will be the loan installment. Again, your goal is to get a low enough interest rate, so you pay less each month, and get out of debt faster because interest does not accrue so quickly.
As with a balance transfer, much of your success in making this do-it-yourself option with debt consolidation is having the right credit ratings to get a good interest rate. If your credit score is low, you either may not be approved at all or the interest rate is going to be too high to provide the benefit you need. Again, you can really make your financial difficulty worse if you use a debt consolidation loan not guaranteed in the wrong circumstances.
On the other hand, you need to make sure that you will not be increasing your debts while you are in the process of repaying the loan. If you use your credit card before having the unsecured loan repaid, you will be increasing the debt burden instead of decreasing it, and you could end up with greater financial difficulties than when you started.
Can I consolidate debt consolidation loans?
This is an interesting question and a situation in which people often get involved when they are trying to find debt relief with a consolidation loan..Read more
Self-Made Consolidation – Option # 3: Secured Debt Consolidation Loan
The last option to consolidate your self-made debt is similar to the second option, but taking a secured loan instead of an unsecured loan. A secured debt consolidation loan is also known as a home equity loan because you put your home as collateral in case you do not pay what you owe. While you can get a lower interest rate with a weaker credit (because the loan is guaranteed), most financial experts warn against using this option.
Credit card debts are unsecured debts; This means that, however much your creditors may threaten you and harass you with the collection, you can not take your house or other property without a court order, such as with a bankruptcy decree. A home equity loan is a guaranteed debt, so if you do not pay off the loan in full, the creditor can take your home to collect. The disadvantage is too great and puts your home at risk just so you can pay for your credit cards.
The Two Best Methods to Pay Credit Cards
There are two proven methods to reduce credit card debt effectively, when they are distributed across multiple accounts. The best way to do it, depends on your budget and your available cash flow:
Debt reduction plan with a high interest rate – the reduction method. This is the most profitable method, since it reduces your debts in order of APR level, starting with the highest rate in the first place. This helps minimize the total interest charges.
Low balance debt reduction plan – the promotion method. This method helps you generate momentum if you start with a limited cash flow. Eliminate first, the debts with the lowest balances.
How Debt Reduction Works
No matter which reduction plan you choose, both work in much the same way. The two options differ only in the way of ordering the debts for their elimination.
First, optimize your budget to maximize the cash flow available for debt elimination. You make the minimum payments required on all your credit cards except one. All of your extra cash flow will make a larger payment on a debt until it is completely eliminated. Then go to the next debt, and then to the next, until every debt has been eliminated and you have zeroed all the balances of your accounts.
How Long Is the Debt Reduction?
The timeline for a debt reduction plan varies based on how much you owe in total and how much cash flow you have available. However, experts recommend that you should be able to eliminate your debt within 5 years or less for a debt reduction plan to be effective.
Use a credit card debt reimbursement calculator to help you chart a strategy and see how long it will take. If you can not develop a plan that eliminates your debt in full in five years or less then it may be better to look for another solution.
Comparing the benefits and challenges of each plan.
The right time to operate down
The main benefit of going down (in descending order of the interest rate level) is that it eliminates the debts with the highest interest rates in the first place. These debts cost more with each billing cycle, so reducing them first is the most profitable way to pay off your credit cards.
The challenge is that your higher interest rate debts can also be your larger balances. This happens if you have accumulated balances on reward credit cards that earn points, miles or cash, or you have stopped paying your higher balances on time, and a penalty fee has been applied.
In this case, if you have a limited cash flow, it can take a long time to eliminate these high-rate debts (APRs) in full. Basically you will not have enough cash flow to make rapid progress, which reduces the effectiveness of this strategy.
When is it better to start from below
The method of starting with the lowest balances (roll up) is designed to overcome the lack of cash flow with a limited budget. It takes advantage of the fact that once you eliminate a credit card debt, that money is released so you can put it into other obligations.
Eliminate your debts in order of the lowest balances so you can build an impulse to deal with your larger debts. It’s like a snowball rolling down the hill, rolling more and more, with more weight as it goes.