How to Create Your Debt Consolidation Action Plan (Step-by-Step)
Not everyone that uses debt consolidation has positive results with it. And the reasons are clear: they didn’t have a plan in place to help them take their debt reduction from the beginning to the end.
Basically, they just winged it. They went online, signed up for whatever form of consolidation they could qualify for and then relied strictly on that. But that’s not an actual plan.
Would you apply for a job without actually planning for it? Of course not. You would want to be prepared for it. You’d learn all you can about the company and the industry before you went in for the interview. After all, it’s too important to leave to chance.
And that’s the approach you need to take when consolidating your debt. You need a plan and you need to prepare because getting rid of your debt is a big deal. It needs to be taken seriously.
People that don’t succeed at something don’t make the necessary preparation and then they wonder why it didn’t work out for them.
You don’t want to be a part of the group of people who takes out a debt consolidation loan and then realizes their finances aren’t getting any better.
So what kind of planning should you be doing? I’m glad you asked. This article covers all the things you should do to prepare and follow through with your credit consolidation.
Putting Your Debt Consolidation Plan into Motion
Using a consolidation company to get rid of debt is a little different than attempting to pay down debt on your own.
But a lot of the same principles apply whether you go with a loan, balance transfer cards, debt settlement or the do-it-yourself option.
1) Determine How Much You Can Afford to Pay Every Month
You do this part by adding up all your debt and monthly expenses and then subtracting that number from your total net income.
For instance, if your monthly debt and expenses equals $1,200 per month and your monthly income is $1,800, you have $600 available every month to pay towards your debt.
But give yourself a little breathing room. In other words, make sure the amount you can afford to pay factors in some unforeseen expenses. From the example above, you can say that you only have $500 per month to pay down debt. That other $100 you should save for unexpected expenses that might pop up.
If you decide to go with a debt consolidation loan, this will help you understand whether the loan you are getting is worth it. If the loan you are considering still costs more on a monthly basis than what you can afford to pay, then you’re better off walking away.
If you decide to employ the strategy of negotiating with creditors yourself, knowing how much you can afford to pay will help you in your negotiation.
2) Make a Debt Reduction To-Do List
Make a list of what you should be doing every day to help your debt cause. If you’ve done step number one above, then you already know what your monthly expenses are. From that, you should be looking at what you could possibly cut down on or cut out of your monthly budget altogether.
Whatever you don’t need, get rid of it. Keep this list handy and any time you see something that you could be doing, add it to the list. This is something you should be doing on a daily basis. You can add things like “control impulse buying” to the list.
This is a crucial part of making debt consolidation work. Many people mistakenly believe that once they consolidate with a loan or in some other way, they are finished with the hard part. But the reality is that the hard part starts with spending and saving wisely… every day.
Your list will be one of the most powerful tools in your debt consolidation action plan. The more stuff from your list that you do, the more empowered you will feel and the more confident you will grow. It all feeds off each other. I can’t stress enough how important it is to get this part right.
3) Give Your Creditors a Call
Before you even think about consolidating, give your creditors a call and try to negotiate with them to give you a better rate of interest.
I know, it seems like a lost cause. While you may not like this suggestion, it’s worth pursuing. And you might even be surprised by some of your creditors’ willingness to work with you on the matter.
So go ahead, give them a call and see if they are willing to lower the interest on your debt. You have nothing to lose and a ton of money to gain. Many people will completely avoid this suggestion.
But you could be making a huge mistake. Creditors would rather get some of there money back than have you file for bankruptcy and risk getting nothing.
4) Try to Improve Your Credit Score
If you don’t need to consolidate right away, try to improve your credit score. With most lenders, you’ll need a credit score of at least 620 or higher to qualify for a new consolidation loan. The higher your score, the better your rate will be.
So, by improving your score, you’ll be able to get better rates and lower monthly payments.
Without a good credit score, getting another loan is almost impossible. And if you have a high debt-to-income ratio, that too will hinder your ability to qualify for another loan. Lenders look for a debt-to-income ratio that’s 36% or lower.
Not sure what your ratio is. Calculating it is very simple. You simply divide your total debt by your gross income. As an example, let’s say your monthly debt is $2,500 and your gross monthly income is $5,000. You would divide the $2,500 by $5,000 and you would have a debt-to-income ratio of 50%, which is not good from a lender’s perspective.
So improving that and your credit score greatly increase your chances of getting approved for a loan.
Unfortunately, when you’re already struggling with your current debt, improving your debt-to-income ratio can be extremely difficult.
You really only have two options to accomplish this. Number one, you could reduce your monthly debt by paying off your smaller debts first. Your second option is to start earning more money. Those are the only two ways to lower the DTI. When you’re already having trouble making ends meet, it’s tough to improve that DTI.
But if you and your spouse got a second job, that would help tremendously. It’s something you should contemplate. Otherwise, another loan is highly unlikely.
5) Determine Who You’ll Work With
Obviously, if you’re going to consolidate by using a debt company, you’ll want to get the best rates and terms on it. First, you must decide what kind of debt consolidation you want to do or that you can qualify for. You have many options such as a consolidation loan, credit counseling, debt settlement and balance transfer credit cards.
Then, shop around and compare companies. Not sure what kind of companies and programs are available to you? Then you can go here and learn all about your options and which firms might work for you. Once there, you’ll learn about the 5 programs you have as options and you’ll see which firms are the best choice.
You may even decide that you don’t want to use another firm to consolidate. You may decide to do it all yourself. Everything is laid out for you in plain English so you can make the right call.
6) Try to Pay Off Your Smallest Debt on Your Own
This will reduce your debt-to-income ratio and help you qualify for a loan if that’s the type of debt consolidation you are considering. It will also give you the confidence you need to tackle the rest of your debt. It’s a big psychological boost and it works.
If you don’t have enough money left over each month to do this, then implement some of the suggestions above such as getting a second job and selling whatever you don’t need. Anything you can do to get this done will go a long way.
The bottom line when it comes to debt reduction is that it won’t be easy. You’ll need to get serious about it and stay focused until you’ve completely erased all the debt.
Don’t get sidetracked and fully commit to getting your finances back in tip-top shape. Accomplishing your goal can open up so many other opportunities for you down the road. Whether you want to buy a new home, get the car you desperately need, or take care of your family in other ways, getting rid of your debt can help with all of those things.
Here’s another important aspect to remember about the tips listed above. If you are unable to do one of them immediately, that’s ok. You can always try again down the road. So don’t get discouraged if you can’t pull it off right away. Part of good planning is being able to change and adapt as needed.
Also, if you’re one of those people that’s always focusing on the negative side of things, then you really do need to change your mentality. For example, instead of thinking about how hard the job of reducing debt is going to be, think about how good your life will be once you’ve rid yourself of it. This simple mental makeover will keep you motivated and wanting to get to the finish line.