Taking a consolidation loan to pay off Credit Card debt can be a smart play — if you do your research first to ensure you’ll come out of it with a lower interest rate, a shorter payoff time horizon, and lower monthly payments.
However, knowing what to do after consolidating credit card debt is just as important as choosing the right loan to amalgamate those obligations into one instrument in the first place.
Develop a Spending Plan
In all frankness, this should before you take the consolidation loan to ensure things will work out the way you need them to. Totaling your monthly expenses and comparing them to your income will help you determine the amount you’ll need the monthly payment on the consolidation loan to be to use it to eradicate your debt.
Once you’ve done those calculations, you’ll know how much extra cash you’ll have each month so you can earmark it accordingly. It is also an excellent time to look at unused memberships and subscriptions, trim the fat from your entertainment budget and figure out how to eat at home more, so you can spend less on restaurants and other frivolities.
A key aspect of your plan should also be establishing and growing an emergency fund. Most financial gurus recommend this fund contain between three and six months of your monthly expenses. This way, you’ll be able to carry on without resorting to credit if your income disrupt or you face a sizable unexpected loss.
Keep Credit Card Accounts Open — And Don’t Use Them
Two mistakes many people make after doing a credit card consolidation is closing the paid-off accounts or using them again. Closing the accounts will lower your available credit, which can trigger a reduction in your credit score.
Using the cards again could mire you in debt once more, with a consolidation loan now demanding a portion of your income as well.
Avoid Opening New Accounts
When word gets out to lenders, you’ve paid off your credit cards, “pre-qualified” and “pre-approved” credit offers are going to rain down upon you like a monsoon in the Amazon River basin.
Don’t go for it.
Remember why you took the consolidation loan in the first place.
The whole point is to eradicate your debts as quickly as possible. Anything you do to create more obligations means reaching your goal will take longer. You’ll have to accommodate another bill in your spending plan, you’ll be looking at additional interest payments, and you’ll have less money to put toward your future goals.
Keep an Eye on Your Credit Card Report
All of those zero balances have the potential to attract fraudsters the way light bulbs draw flying insects at night. They’ll come sniffing around, looking for ways to usurp some of that unused capacity, in the hopes you won’t notice until it’s too late.
Reviewing your credit reports will help you nip that activity in the bud by disputing it before it blossoms into a full-blown problem. You can get free copies of each of the three of them yearly at AnnualCreditReport.com. The smart play is to get them one at a time every three to four months. It will maximize the value of that asset by giving you more frequent looks than you will get if you take all three once a year.
Knowing what to do after consolidating credit card debt is just as important as choosing the right way to consolidate that debt in the first place. These tips will help you maximize the probability of your success.
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