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4 Debt Consolidation and Debt Management Strategies Part 2

Debt Consolidation and Debt Management Strategies


In today’s credit card culture of charging now and paying later, it’s easy to forget about your up-coming financial obligations. You might feel like all of your money is going towards your credit card bills. If this sounds like you, check out these 4 debt-consolidation and management strategies that may help you financially.

Debt consolidation may help you combine several debts into one and could even save you money. There are several ways you can consolidate debt, but before you move forward with a decision, you should discuss your options with your accountant, tax advisor, legal counsel and other representatives whom you trust and rely upon for unbiased financial information and advice that you can apply to improve your unique financial situation. 

1. Evaluate Your Current Financial Situation

When you’re faced with a spending decision, especially a large purchase decision, it’s ideal to verify that you can actually afford it and that you haven’t already committed those funds to another expense obligation. That might mean using your budget and the balance in your checking and savings accounts to decide whether you can afford the purchase that you want to make. Remember that just because the money is there doesn't mean you can make the purchase. You may also need to consider your future bills and expenses before your next payday.

When you have multiple credit card balances, it might be more beneficial to focus on paying off one credit card at a time rather than spreading your excess debt payoff money across all of your credit cards. You may make greater improvements when you pay a lump sum to one credit card each month. The challenging part is figuring out which credit card you should focus on paying off first.

There are various strategies to paying off your credit cards. Either by paying off the credit card with the highest interest rate first or the one with the lowest balance first. To decide which strategy is best for you, think about whether you'd like to save money on interest or get rid of entire credit card balances quickly. Remember to always evaluate your entire financial situation.

2. Tapping into Your Home Equity

A Cash Out refinance is a way of tapping into the equity you have built up in your home as it may have increased in value over time. It involves retiring your current mortgage by taking out a new one, possibly with different terms, and for an amount that is larger than what you currently owe. The excess over your old loan’s outstanding balance, plus closing costs, and the new one is then paid out to you in cash at closing.

If you've been thinking about getting a Home Equity Line of Credit, consider a Cash Out refinance to access your home equity. You may want to use some of the money invested in your home to get rid of other debts, like credit card balances or to devote to your children’s college tuition bills. Perhaps you’re looking to self-finance home improvement costs or pay medical bills. You may even prefer to use it to fund vacation homes, a rental property, or start a business.

Like a home equity loan, a home equity line of credit or HELOC is secured by your home. But instead of receiving the money in a lump sum, you receive a revolving credit line, up to an approved limit, you can use to borrow as little or as much as you need throughout your draw period. The draw typically lasts 10 years followed by a repayment period of 20 years.

Unlike a fixed-rate home equity loan, a HELOC has variable interest rates that are likely to fluctuate over the life of the loan, making your payments less predictable. A HELOC requires a second monthly payment that could increase if rates go up, while you could have one, fixed payment with a cash-out refinance.

A lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage.

3. Balance Transfer Credit Card

A balance transfer is paying off the balances on your existing credit cards by transferring them to another credit card account with a lower interest rate.

Indeed, some balance transfer credit cards advertise a 0% APR for up to 24 months, allowing you to temporarily pause interest while paying off your credit card.

One-time transfer fees may apply, and you’ll generally need a good-to-excellent credit rating for approval. There may also be limits on the amount you can transfer. 

4. 401(k) Borrowing

If you’re fortunate enough to have a 401(k)-retirement account (about one in five Americans do), your account may include a borrowing privilege. Many typically allow you to borrow up to half of your vested balance, up to $50,000 (whichever is less) for five years.

The upside of such a loan is you don’t need a credit check and the interest you pay on your loan is up to you and not a bank or credit card company. 

Should you leave your employer or be fired, your loan generally may have to be repaid within 60 to 90 days. Speak to your account or financial advisor about borrowing from your retirement savings as a debt consolidation strategy.

There are several debt consolidation plans and debt relief options to help you regain control of your finances.  

To get started or to learn about how a new home loan might be right for your financial situation, please contact us today.

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