What To Do After You Consolidate Your Debts
Debt Consolidation feels like having a weight taken off your shoulders. Now the trick is to keep it off. In this section we give you some tips for keeping that debt load low.
- Continue to make payments on your old credit cards while you wait for the balance transfer to take effect.
- If you’ve used a Debt Consolidation Loan to pay off credit cards, stop using the cards. Don’t get into the trap of ending up with a debt consolidation loan plus high credit card balances to pay off.
- Adjust your spending habits.
- Use credit cards only for genuine emergencies and purchases that can be paid off in 90 days.
Continue to make payments
Depending on the kind of debt consolidation you use, paying off your old debt can take a day or two to several weeks. During that time, you will still be responsible for any payments, which fall due on the original credit cards or loans. Make sure that you continue to make those payments until you receive confirmation that your old balance has been paid off. If you don’t, it will have a negative effect on your credit rating, and, even worse, if you are already in arrears, could send your account into collection.
Stop using the credit cards you just paid off
A lot of people make the mistake of, once they have their debts consolidated, continuing to spend on their old credit cards. This results in having a debt consolidation loan to pay off PLUS a new credit card balance to deal with. In other words, twice the debt. A good strategy for keeping from spending on those cards is to put them away somewhere – in a drawer or even your safe deposit box – and save them for emergencies only. Just remind yourself, a zero balance on your credit card is not cash in your pocket. You just moved the debt to a different pocket, the debt consolidation loan. Plus, every new penny you spend is more money that will have to be paid off later.
Adjust your spending habits
If you’re consolidating because of high credit card balances, now’s the time to look at how you use your credit cards. Are you following the 6 Rules of Wise Credit Card Usage?
Some people just can’t seem to control their spending. For them, a credit card is an open invitation to spend. If this sounds like you, you may be a spendaholic. Take our simple Spendaholic Quiz and see how your spending habits match up. If you’re a spendaholic, you’ll have to consider taking drastic measures to control your credit card usage. Limit yourself to one card and put that card away in a place where you can’t get at it easily. Having a family member or friend hold it for you is a good idea. Use it only for emergencies.
The 6 Rules of Wise Credit Card Usage
- Carry only one card around in your wallet at a time. If you need to carry a second card, it should be a gas card.
- Set a budget for how much you can pay off each month and pay off the balance in full. Using a credit card regularly will establish your credit history, but paying the balance off in full each month will avoid interest charges and still look good on your credit report.
- Charge only small amounts at any one time. Keep track of what you charge and make sure you don’t spend over your budget.
- Don’t collect too many credit cards. The temptation to spend may be too great. For most people, one or two bankcards, a gasoline card and a department store card are all that are necessary. Too many cards can hurt your credit record, as lenders look at each card’s maximum limit as a potential debt that increases the risk of lending to you.
- Pay your all your bills on time, not just credit cards and loans, but utilities and telephone as well. Your record of payment on your phone bill and electric bill can end up on your credit report and affect your credit worthiness.
- Don’t spend up to your credit limit. Spending more than 30% of the limit on any card can work against you when it comes to evaluating your credit worthiness. There’s the possibility that you’re becoming overextended and won’t be able to repay. This makes you a higher risk when you go to apply for a new loan or credit card.
Use Credit Cards only for Genuine Emergencies
There are two ways credit cards come in handy. One is establishing a good credit history so when it comes time to take a major loan, such as getting your first mortgage, the lender can see that you’re a good credit risk. The other is for emergencies and large purchases.
An emergency might be something like the water heater in your home dies and has to be replaced. Or there’s a medical bill that insurance doesn’t cover. A credit card will help you pay for those unforeseen expenses.
Having a credit card also makes it possible to make large purchases, but there’s a danger associated with spending big amounts at one time. You may overspend. Also that large purchase may look attractive now, but after months and months of repayment, it may not be so appealing. There’s a way to keep the spending in hand and still have that item you might not be able to afford at the moment. That’s to set a budget. Break the amount of the purchase into thirds. Then pay off one third each month. Your debt will be discharged in 90 days. If you can’t afford to do this, then the purchase may be too large for your current budget and you should rethink the purchase. You could, for example, save up for part of the purchase price and then put the rest on the 90-day plan we’ve just described.