How to Stay on Track with Your Debt Consolidation Loan
If you’ve just taken out a debt consolidation loan, you’ve taken a great first step toward becoming debt-free. To reach the light at the end of the tunnel, it’s important to continue in the right direction and avoid the temptations that can steer you off course.
Here are a few tips to help you stay on track:
Tip 1: Use your loan like you intended – pay off that debt!
Getting your personal loan to refinance or consolidate your debt is a big step towards financial freedom, so don’t forget that this was your goal! It can be tempting to set aside some of your new funds for something more fun – resist the temptation!
If you’re trying to pay off credit cards, paying more than the minimum monthly payment is crucial to getting out of debt and staying out of debt for good. Getting smart about your payment strategy, especially if you’re consolidating multiple debts, can help you get debt-free faster. Consider which payback method is best for you:
Avalanche method: pay off your highest interest rate debts first. Make the minimum payment on all debts except the one with the highest interest rate—for that one, pay the minimum plus the extra amount you’ve designated in your budget. Once that balance is eliminated, move on to the next-highest interest rate debt.
The snowball method: pay off your debts in order from smallest to largest balance. Make the minimum payments on all balances except the smallest—for that one, pay as much as you can. When it has been fully paid off, turn your attention to the next-smallest balance.
With the avalanche method, you’ll save on total interest costs compared to the snowball method. On the other hand, the snowball method might be a better choice if you’re motivated by immediate gratification. A debt payoff calculator can provide encouragement as you watch a debt-free future draw closer each month.
Tip 2: Rein in your spending
Spending less is easier said than done for most of us. But, with a little planning and drawing awareness to your spending habits, you can make small adjustments that will help your bank account.
- Create a budget that you can stick to: a budget is the foundation to controlling and tracking your spending. Record your income and your expenses and take stock of where you can cut back on your spending.
- Don’t get tricked by the big red sale sign: those signs are made to grab your attention and give you an excuse to swipe your credit card because it looks like a great deal – don’t be fooled! Remember to shop for what you need, not what you want because of the illusion of a good opportunity.
- Spend with purpose: it’s easy to walk into the grocery store for a few items and then find yourself with a cart full of unnecessary things. Mindless shopping might be a fun escape, but there’s no escaping the debt load you create. Mindful shopping means you’re keeping your shopping goals (and your overall financial goals) in mind. Make a shopping list and stick to it.
- Leave your credit cards at home: credit cards are convenient, but they can make it too easy to swipe while forgetting about the bigger impact. Try bringing only the cash you know you need for the day. It’ll help you be more aware of how much you’re spending and when you need to pump the breaks.
Tip 3: Don’t take out more credit unless you really need it
Each time you take on more debt, the risk that you won’t be able to manage all your payments increases. Keep in mind, each time you apply for credit and get a hard inquiry, your credit score may take a hit.
While applying for new credit can make you look riskier to lenders, credit scores are typically not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. In general, these are treated as a single inquiry, so it’s okay to shop around for the best rate if you’re serious about getting a new loan. On the other hand, every application for a credit card is considered a hard inquiry and can have a real impact on your score.
Tip 4: Set it and Forget it
Automatic payments are an easy way to stay on track and remove the worry of a bill going unpaid. Your payment history represents 35% of your credit score, so making on-time payments will not only keep you in good graces with your creditors, but can help your credit score as well.
Don’t just set up autopay for your loan through Upgrade. Take a look at your other monthly bills and see what you can automate. Investing time to automate your payments will save you time every month, with no hassle of logging into your accounts or mailing checks.
Tip 5: Check your Credit Health
Maintaining strong credit health is not very different than maintaining your physical health. Regular check-ups and exercising good behaviors can help you continue to stay strong and prevent setbacks.
Visit Credit Health regularly to check your credit score and see if there’s anything you do to improve your credit profile. After all, it was your strong credit score that helped you get this loan, so take care of it!