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Consolidating Debt

A Guide to Consolidating Debt: 6 Key Factors to Review Before You Take the Plunge

A Guide to Consolidating Debt: 6 Key Factors to Review Before You Take the Plunge

It's no wonder that Australians are swimming in debt. Granted, we are all responsible for the way we manage our finances, but it can become even more difficult to keep spending in check when banks aren't providing any help.

Big banks in Australia are making record profits, according to data from the Australia Institute. Much of this has to do with the fact that they are taking advantage of the credit needs of lower income citizens.1

To provide an example, the Australia Institute surveyed 1,360 people. 66% of the group had received unsolicited credit card offers from a bank within the past 12 months; 50% of the group had been offered an increase credit limit without requesting it.1

For citizens struggling with debt, the wide availability of credit from banks can make it even easier to go deeper into debt. If you find yourself faced with an overwhelming amount of credit card debt and personal loans, as the average Australian does, you may now be considering debt consolidation as your only alternative.

But before you take the plunge… It's important to understand the ins and outs of debt consolidation.

Debt Consolidation: Where to Begin

  • Assess your debt. If you have a small amount of debt, you may not need debt consolidation whatsoever. If you're hoping to pay off several credit cards with high interest rates, a balance transfer may be a better choice than massive debt consolidation. If you can transfer high interest credit card debt to another credit card with 0% interest for a temporary time period, it may give you enough breathing room to pay off the debt quickly and save money on interest.

  • Create a financial strategy. The only way that debt consolidation is going to be effective is if you are disciplined and responsible in your monthly payments. Many people make the mistake of consolidating their debt and taking on more lines of credit. If you don't make changes in your spending habits first of all, then debt consolidation could create even more debt that is difficult and even impossible to pay off in the long run.

  • Consider credit counselling. In order to help you make the wisest decision, credit counselling can be a smart move. A credit counsellor will be able to assess your debt with you to tell you what type of debt consolidation is best, if at all. A credit counsellor will also help you to create a financial plan and establish good spending habits prior to debt consolidation so that your odds of success in paying off debt are dramatically increased.

  • Decide how to consolidate your debt. If you are a candidate for debt consolidation and need to lump together large amounts of debt for repayment, you can consider home equity debt consolidation or a debt consolidation loan. If you have equity on your home, it is often cost-effective to use your home as collateral to pay off your other debt. However, if you are not able to repay your debt, you could lose your home. This is why many people prefer a basic debt consolidation loan that will lump all other debts together into one monthly payment.

  • Start saving instead of spending. If you do take out a debt consolidation loan, it doesn't mean that the coast is clear - even though it may look like you have more money to spend each month. A debt consolidation loan must be paid off as much as possible on a monthly basis in order to pay down the principal of the loan. If you only pay the minimum each month, then all of your debts will remain active for the entire life of the loan, which could be up to 30 years!

  • Pay ahead. The only way for debt consolidation to be successful is if you are willing to tighten your belt and make additional payments on a monthly basis. This will help to reduce the principal of the loan in order to eliminate your debt quickly. This can be achieved through creating a household budget that you will stick to in order to avoid going further into debt. If you have serious problems curbing your spending, consult with a credit counsellor and cut up your credit cards so that you are not tempted to overspend.

If you have a large amount of unpaid debt, debt consolidation can be used to reduce the total amount of interest that you pay each month.

The typical interest rate for a debt consolidation loan is often significantly less than high interest credit cards. However, take the time to thoughtfully review all of the guidelines listed above before considering debt consolidation. The only way that debt consolidation will be successful is if you have a financial strategy in place to ensure that all debt is paid off early or on time.