Best Ways to Consolidate Debt

Most people carry some level of debt load throughout various points in their lives.  Large, long term debts such as mortgages, school loans or car payments can be a necessary evil that provides the opportunity to live with some of the luxuries and benefits of life today while taking a number of years into the future to pay for the cost of these life enhancing features.

Whenever this “buy now, pay later” lifestyle spreads into other areas of life, it can be tempting to rack up significant credit card debt, often with back breaking interest rates.  If this happens and gets out of control, as can sometimes happen if you’re not vigilant, many people look into ways to consolidate their debt and bring it under some sort of manageable control.

While getting into debt can be relatively simply, getting back out again may require the wisdom of Solomon.  Debt consolidation services abound; some are legitimate, others are scams that create further dependence and debt.  Unless your debt burden is so far out of control that you can’t imagine resolving your problems without a debt counselor, your first line of defense should be to sit down with your loans, credit card statements, pay stubs and banking records and formulate an action plan.

1)       First, categorize your debts.  Long term debts requiring a set monthly payment for a long time into the future should go in one pile.  These debts (mortgage, school loans, car payment) are with you for the long haul.  Accessory debt, which is credit card debts as well as anything else you’ve committed to making a payment towards on a monthly basis should go in a second pile.  Accessory debt may also include such things as gym memberships, country club fees, even recurring magazine subscriptions.  These are the debts that can, and should, be dealt with first as you really do have some control over this outlay of money.

2)      Start of freeing up money that you can use to pay down your debt.  Cancel your membership at the gym or country club.  Go to the public library for the latest editions of your favorite magazines.  Above all, put away the credit cards!  New future money is going to be directed towards paying off old debt.  The temptation to add to existing debt should be avoided except in the case of a legitimate emergency (a shoe sale is not a legitimate emergency).

3)      Take a look at your credit card statements.  Starting with the one with the highest interest rate (not the highest balance due) use your newfound “extra” money to pay against this balance.  Continue to make standard minimum payments against all other existing credit cards in an effort to fortify and protect that ever critical credit score.

4)      While you’re on the subject of credit card balances, try calling your credit card companies to negotiate an interest rate reduction.  It can’t hurt to ask and could result in saving you thousands of dollars over time.

5)      As you pay off a credit card, use that money (more of the “free” money) to attack the balance of the next highest interest rate bearing credit card.  By now you should detect a pattern.

6)      After you’ve finished working on those credit card balances, set your sights on that mortgage payment.  Look into refinancing at a new, lower interest rate.  Did you know that by simply making one extra payment per year against the principle you can knock about eight years off a standard 30-year mortgage?  Another option to look into is the bi-monthly payment plan where you make half of your monthly payment every two weeks.  This is another good plan of attack for reducing your mortgage debt.

By now it should be clear how to go about isolating various pockets of debt and wiping them out.   Once you’ve learned the hard lesson of extricating yourself from debt, you should use your hard won victory to keep from ever making the same errors in money management judgment again.  Practice placing most of your spending emphasis on cash purchases.  Save your credit cards for true emergency purchases.  Equally as critical is developing a regimented savings plan as a line of defense for the future.