Let’s face it; overspending during the holidays is an easy thing to do. Even if you set a budget, unexpected gifts and last minute must-haves often push savvy shoppers into the over-spending zone. As if January wasn’t cold enough, here comes your credit card statement.
It’s time to look forward. For some, consolidating credit card and other outstanding debt may be a great solution. For others, a few extra payments and you’re set. So how do you know where you fall? Ask yourself these simple questions:
1. How Much Debt Do I Have?
A debt consolidation loan combines several account balances owed to various lenders into one, more manageable, payment. If you have a couple major credit cards, a car loan, and 3-4 store cards with balances on them, you might find it challenging to make significant payments on each one. Not only does one monthly payment simplify your financial life, but it can often save you money if your cards have higher interest rates.
Consolidating your debt will only work if you make adjustments to your spending. Use budgeting tools, like those available here to help you make sure that your spending does not exceed your income. And if it does? Use helpful e-Alerts and your spending chart within UBTgo to track where you’re over-spending and identify ways to cut back. Remember, debt consolidation does not wipe out the debt; it simply transfers debt to a more manageable monthly payment.
2. How Much Will I Pay In Interest?
You saved an extra 20% by opening up that store credit card, but did they also mention your interest rate? Many unsecured credit cards carry very high interest rates – sometimes 20% to 30%. Carrying a balance on these cards, even for a couple months, can more than pay back the store for the initial discount you received.
Start by doing your homework. When your bill arrives, don’t just look at the amount due – look at your interest rate. Your statement will also show you how much you will pay over time if you only make the minimum payment. Pay close attention to these numbers, as they will help you decide if a debt consolidation loan will ultimately help you save on interest over time.
3. How Long Will it Take to Pay it Off?
Depending on the amount of debt you have, you may be in a good position to pay off your debt quickly. If you cut back on eating out, could you have all of your debt paid off in two months? If so, you probably do not need a debt consolidation loan. Instead, start by paying extra on your highest interest cards. Save your lowest interest rate debt for last.If it will take you several months (or even years) to pay off your debt, a loan may be a good option for you. Not all debt consolidation loans are the same, so be sure to read and understand the fine print and any fees before taking out a loan. Also, keep these factors in mind when considering a debt consolidation loan:
- Is the interest rate lower than your current debt?
- Do you have a car or equity in your home you could use as collateral? Often securing the loan may provide for more favorable interest rates than an unsecured loan.
- Are the monthly payments manageable on your budget?
- Are you committed to living on a budget to minimize new debt?
- Are there pre-payment penalties? If so, consider shopping around for a better loan.
Finally, once you have a card paid off, consider whether or not you really need it. It could be beneficial to keep one to two cards with the best rate and perks open and close any remaining cards. If you leave all of your cards open after they are paid off, you may be tempted to charge again with the newly freed credit limit. Closing the card is an easy way to avoid the temptation. Even if you miss out on a 20% off deal now and then.