Debt consolidation involves the process of combining your debts into one loan with a lower interest rate to help make payments more manageable and hopefully allow you to pay off your debt quicker. If you've recently consolidated your debt, it can feel like a small weight has been lifted from your shoulders if you've been struggling to make payments in the past.
However, successfully finding a new lender and a lower interest rate while simplifying your loans is just the beginning. This type of debt relief is not an end solution, but it is a stepping stone or a path you can take toward becoming debt free.
There will still be work to do and some challenges that you may encounter here or there after you consolidate. Here are three things you must do after consolidating your debt.
Keep Paying Off Your Debt
Once you slightly relieve your burden after consolidating, it's important to keep making progress and continue to pay off your debt. Sometimes your lender may decide which loans you should pay off first. If they don't, stick to paying off the loan with the higher interest rate.
For example, if you consolidated some maxed out credit card balances into one loan and consolidated some of your student loans into another loan, you may want to focus on paying off the credit card balance first if the interest rate is higher. You should still make the required payments on all of your debt, but focus more on the ones with the higher interest rates because those are the ones that are costing you the most money in the long run.
Make sure you write down your due dates and commit to making consistent payments on time. Late or missed payments can lead to your lender taking legal action or even bankruptcy.
Stop Accumulating More Debt
Consolidation is meant to help you get out of debt quicker, but you can't defeat the purpose by taking out more loans and accumulating more debt. If you pay on your debt each month, but still overspend with credit cards or take out other loans, you won't really make any progress.
It's best to refrain from using credit cards if you are currently paying off credit card debt and try to live below your means so you won't need to take out any additional loans.
Some helpful strategies include removing credit cards from your wallet and placing them in a safe place along with creating a new budget to cut some of your expenses and help narrow down exactly where your money should go each month.
Even if your new loan doesn't require it, consider whether you should close your accounts after you pay off the consolidated balances to avoid getting back into debt.
Change Your Spending Habits
This is probably the most important step. In order to continue making consistent payments and refrain from accumulating anymore debt, you'll need to change your spending habits and improve the way you manage your money.
Start prioritizing your needs over your wants and limit the amount of credit cards you carry. If you believe you can properly manage your credit cards and avoid overspending, spending only a small percentage of your limit and paying the bill off in full each month (after you pay off your consolidated debt) can really help build your credit score.
If you feel like you have to purchase something, take a few days to truly consider whether you should spend the money or not. When it comes to large expenses like college or simply emergencies, consider how you can minimize your costs or start saving up in advance to develop a nice financial cushion.
If you've recently found the right consolidation option for you or if you're considering consolidating your debt, be sure to keep these three steps in mind as you work toward relieving the burden of debt. Consolidation may be a crucial first step in getting you back on track with your finances, but changing your behavior and actively avoiding debt will help you get rid of the debt for good.