Personal Finance

How to undertake debt consolidation: 5 step guide

debt consolidation

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This guide outlines how to approach debt consolidation and clear your debts, step by step.

Millions of people are in debt, with some people feeling that they’re in over their heads and don’t know what to do. If you’re struggling to lower your debt or become totally debt-free, here are a few steps on debt consolidation and how to clear your debts — and stay out of debt in the future!

Debt consolidation steps

Step 1: Gather your information and get organized

When consolidating your debts, it is important to gather as much information as possible about each debt. This includes the original creditor, the interest rate, the payment schedule, and any late fees or penalties. The more information you have when you’re ready to crack down on your debt, the better off you’ll be. 

Step 2: Consolidate your debts

Debt consolidation can help you get your debts under control and reduce the amount of money you owe. There are several different debt consolidation options available, so it is important to choose the one that is best suited to your situation.

One debt consolidation option is to combine all of your debts into one loan. Using debt consolidation loans can reduce the total amount you owe by a significant amount and allow you to get a lower interest rate. You may also be able to get help from a debt consolidation loan provider, who will do all of the work for you.

Another debt consolidation option is to merge your debts onto a balance transfer credit card. Balance transfer credit cards are a great way to get your debts under control. By transferring your debt onto a card with a low or 0% promotional interest rate, you can reduce the amount of interest you’ll accrue and get your debt repayment strategy started right away.

This can help you to reduce your overall credit utilization and get a lower interest rate. However, you will likely have to pay a higher interest rate on the new card once the promotional rate has expired, so it is important to weigh the pros and cons carefully before making the switch.

Finally, you can work with a credit counselor to help you understand your debt situation and to develop a debt repayment plan. A credit counselor can provide you with advice on how to get your debts under control and help you to create a budget that will help you to stick to your debt repayment goals. However, credit counseling often comes with a cost unless you have a low income or work with a non-profit. 

Each has its own pros and cons, so use a debt consolidation loan calculator to help you determine which route is best for your finances. 

Step 3: Change your spending habits

To ensure you stay out of debt permanently, you’ll need to change the way you spend money.

Start by reviewing your monthly expenses and identifying areas where you can reduce or eliminate costs. This may include reducing your cable or internet bill, cutting back on unnecessary shopping, or using public transportation.

Next, establish a budget for your monthly expenses and ensure that you are spending within that budget. If you’ve never used a budget before, here are a few tips to get started: 

  • Make a list of your expenses. Be honest with yourself about the way you spend money every month. Creating a budget isn’t about pretending you don’t love to get coffee instead of making it at home; it’s about finding ways to pay for that coffee run.
  • Make a list of all the ways you earn money. If you have a side hustle, find out how much money you’re making from it each month. If you’re bringing home a paycheck, take that into account as well.
  • Allot your income directly to expenses. Doing this will help you understand where your money goes and what costs keep going unpaid. 

If your budget shows that you’re not earning enough, you can either brainstorm ways to generate more income or cut expenses. Some find it easier to cut down on categories such as “entertainment” or “clothing” instead of individual things like canceling Netflix or not replacing your worn-out shoes.

Step 4: Negotiate your interest rates with creditors

Rates can vary drastically based on your credit score, the amount of debt you have, and the terms of your debt. However, by negotiating, you can often lower your interest rate and save money in the long run.

Before contacting a creditor, it’s important to have an idea of your current interest rate. To find this out, you’ll need to contact each creditor and ask for a rate quote or look at your monthly statements.

Once you have your rates, you’ll need to do some math to see how much money you could potentially save by going back to the creditor and negotiating. To do this, you’ll need to compare the amount of interest you’re currently paying to the amount of interest you could save by lowering your interest rate.

There are multiple rate calculators on the internet that can help you determine what a more competitive rate would be based on your credit score, how long you’ve been a customer of the bank and other variables. 

Be sure to keep all of your documentation when negotiating with creditors — this will help prove that you’re being reasonable and that you’re not trying to take advantage of the credit card company. Documentation will also help if there’s a mistake made or if your creditors fail to update your interest rate to what was agreed.

Step 5: Take things one step at a time

Getting out of debt is often a long process that requires taking things one step at a time, and sometimes looking at government debt relief programs. Forgive yourself for your past mistakes and commit to doing better today. In most cases, it took a while for you to get this far into debt so it may take just as long to get out. But with a little bit of effort and patience, you will reach your financial goals.

The bottom line

Debt can be overwhelming, but there are solutions. Follow these debt consolidation steps, and you will be on your way to a debt-free life!