Borrowers frequently consider debt consolidation as an option to deal with credit card debt. This isn’t surprising; the average American household carries about $16,000 of credit card debt from month to month, and people are looking for ways to get out from under those high balances and minimum monthly payments. For many borrowers, debt consolidation offers a path to becoming free from debt.
With debt consolidation, all of a borrower’s outstanding credit card debts are combined into a new loan. Once borrowers consolidate all their credit cards, revolving store credit, and other debts, they only have to contend with a single interest rate and a single payment each month. Interest rates on debt consolidation loans are typically lower than what the borrower was previously paying, and repayment periods are longer, which leads to a much lower monthly debt payment, too. A typical debt consolidation loan thus puts all that outstanding debt into proportion with the rest of a monthly budget and makes paying down debt more manageable.
However, once you consolidate your credit card debts, what happens to all those credit cards you just paid off? How you deal with all your credit cards–and the average American has three credit card accounts–is a key factor in whether borrowers become debt free or end up in a worse financial situation than when they started. Let’s look at the best ways to use your credit cards after debt consolidation.
Do you even know how much revolving credit your household has? Once you decide to consolidate your debts, the first thing you should do is try to figure how many credit accounts you actually have. This can be challenging at times, especially for households with multiple people applying for and obtaining credit. After you get your debt consolidation loan, the first thing you should do is get organized; determine all the credit card debts you’re actually going to consolidate.
Now is the time to get your family involved in your debt payoff plan. You’ll need everyone’s help if you want to address your outstanding debts and the habits you all have that helped build up those balances. It’s a good idea to start working together on this as soon as possible. So, sit down with your spouse or family members and determine exactly how many credit card accounts you all have.
As everyone in your household writes down the outstanding debts they have, make sure they include store credit as well; many store credit accounts have very high-interest rates, especially after the “six months same as cash” introductory periods end. You may have online store cards that fly under the radar in your home, for websites or video game systems; don’t forget about those! Identifying all those high-interest revolving debt accounts will ultimately help you get them paid off. Over time, this will help stave off interest expenses that are accumulating and help you chip away at your overall debt balances.
Pay Those Cards Off
Once you identify all your outstanding credit and store card debts, use your debt consolidation loan to bring them to zero balances. This is the reason you applied for the loan in the first place, right? Have all the information you gathered on those accounts close by, and then pay off the entire balance on each one. If you had any accounts that were delinquent or went into collection, ensure you pay all those off as well. Once you do, check your accounts online or call the credit card or collection companies to confirm that you’re at zero balances.
Getting your cards to zero balances will also help your credit. When you apply for a debt consolidation loan, you may experience a slight decrease in your overall credit rating. Every hard credit pull, meaning when lenders contact the credit-reporting agencies to check your credit for a new loan, can have a slight, negative impact on your overall credit rating. However, paying off all your credit cards and bringing them to $0 can offset this. The zero balance on the old cards will help improve your credit utilization rating, an important factor the credit-reporting agencies use to compute your credit score. So, once those cards are paid off, your credit rating should experience a gradual boost.
Celebrate a Little Victory
Most people spend years of their lives getting out of debt. It can be a challenging journey to go from carrying $20,000 in credit card debt to being debt free. Unfortunately, many people lose the motivation and discipline to follow through with these efforts and end up back where they started. One sure way to help ensure you stay motivated throughout this very gradual process is to make note of the various milestones you pass along the way. One of the first goals you’ll achieve after getting a debt consolidation loan is bringing your credit cards to zero balances. So, celebrate it!
Why should you pat yourself on the back every time you achieve a small victory? Making note of these milestones, or micro-wins, can help you stay on track to achieve your ultimate goal of becoming free from debt forever. Studies have shown that one of the best ways to achieve momentum toward a distant goal is to acknowledge modest progress along the way. Doing so can help you stay focused and avoid distractions. Noting progress can also help you maintain the motivation that keeps you from pulling those credit cards out and racking up a ton of debt once again.
You should map out your long-term plan for becoming debt free on paper, or something bigger, such as a dry erase board. Every time you achieve a key milestone, such as paying off the balance of those credit cards, you should place a star on the paper or board. Keep your diagram somewhere you can see it, so you have a visual reminder that you’ve begun to achieve some of your goals. Doing so may help you keep those cards out of play, which will only help your cause.
Don’t Cancel Any Credit Cards
Millions of Americans have problems managing debt, and they get into trouble because credit cards are so easy to obtain and widely accepted. After obtaining a debt consolidation loan and bringing those cards to $0, many people instinctively go to cancel their accounts. This is an understandable instinct, and a seemingly rational step. Tip: Don’t do it!
If you cancel all the credit card accounts you’ve just consolidated, your available credit will shrink considerably. This will affect your credit utilization rate almost immediately and lead to a lower credit score. If you expect to use credit in the near future to make an important purchase, such as a home or a car, then canceling your credit cards could make this impossible. In any case, you never know when you’ll need your credit for something, so don’t do anything intentionally that could limit your options.
You may also need your credit cards for an emergency, too, at least initially. If an unexpected event occurs, and you don’t have insurance coverage or the cash on hand to cover the expenses, how will you pay for it? Your only option may be to use your credit cards. While this isn’t optimal when it comes to paying off your debts, it may be your only choice. A bad option when something terrible happens is better than no choice at all. So, keep those credit cards open for now. You should also start building an emergency fund if you haven’t done so already, which we’ll discuss a bit later.
Don’t Use Those Credit Cards for Non-emergencies
Canceling your cards may be bad for your credit but charging yourself into a new pile of debt again is equally bad, if not worse. Once you’ve consolidated your debt, keep your credit card accounts open, but stop using all of them. You can lock them away somewhere safe, or even cut the cards up. Whichever way you decide to do it, ensure you maintain a zero balance on those credit accounts.
Managing these cards once you’ve consolidated the balance on your new loan may get at the root cause of your debt problem. Do you have issues with controlling your spending or living beyond your means? If so, you need to address these problems, before, during, or after you obtain a debt consolidation loan, or you’ll end up with a high level of outstanding debt again before too long.
When you obtain a debt consolidation loan, one way to make sure those credit cards stay at zero balances is to tie that loan into a larger plan to become debt free and improve your finances. If you strongly suspect you have trouble controlling your spending, or otherwise don’t believe you use credit wisely, you should try to find a trusted financial advisor who can help guide you.
Many organizations out there can give you sound advice about your debt problems. Credit counselors, for example, often work for nonprofits, and many times offer their services free of charge. A good credit counselor could advise you on the multiple ways you can use your debt consolidation loan. The advisor could also help you address other issues you have with spending and show you how to keep those credit cards at zero for the long run.
Avoid New Credit
You put your old, paid-off credit cards away, which is great for staying on track to pay off your debts. Now, another pitfall to avoid is signing up for new debt while you’re making payments on your debt consolidation loan. It’s almost impossible to avoid debt ads or offers if you’re a consumer. The junk mail you receive every day in the mail is loaded with promotions for new cards with great introductory offers and amazing benefits. All your favorite stores have impressive deals for their in-house cards as well. However, if you want to break free from debt and stay that way, you’ll need to stop accumulating new debts while you’re paying off the old ones.
Remember, you chose to consolidate your credit card debts to help you improve your financial situation. Taking on additional credit card debt will only harm those efforts. The additional debt will add to the burden you’re already facing in attempting to manage your current debts. Now, you’ll have more bills and payments to track each month, something the debt consolidation loan was meant to alleviate. You’ll also be accruing additional interest expenses each month and could wind up hurting your credit rating.
If you find yourself considering a new credit card or store account after consolidating your debts, you should take a moment to reconsider. You may have an issue with your approach to debt; if so, you need help to resolve it. The debt consolidation loan cannot address the root causes of your debt problems; only you can. This is an example of a time when a credit counselor can help you chart a path to avoid debt pitfalls like this.
Keep Tabs on Your Credit Card Accounts
Once you pay off those cards and put them away, don’t just forget about them. They’re active accounts, and you need to pay close attention to their status. Staying cognizant of your credit card accounts is important for managing your personal finances and budget. It can also be part of building healthy financial habits, so you stay out of debt for good.
After you bring all your credit cards to zero balances, you should make a habit of checking them regularly. Pick a certain time each month–an optimal time is when you’re paying your other bills and assessing your budget–to check all your credit card statements and ensure they remain at zero. If you can, ensure you sign up for email or text alerts that warn you when any transactions occur on your cards as well. This will help ensure that you know the status of your cards at all times and don’t inadvertently incur additional fees or expenses.
Monitoring these cards is important, especially in the days after you consolidate their balances into your new loan. Sometimes, even after you pay off a credit card, you’ll have fees or expenses that have accrued that don’t post to your account until the billing period ends. Staying on top of your statements will help you ensure those fees get paid off and that your card remains at a zero balance. Additionally, keeping close tabs on your credit cards will help you avoid erroneous charges.
Set a New Budget
Do you have a household budget? If you don’t, you’re not alone. Less than half of all Americans use basic budgeting techniques to manage their money; they simply live from paycheck to paycheck. The failure to plan for current and future spending requirements is likely a key reason so many Americans rely upon credit cards for their day-to-day expenditures. If you want to break this cycle in your own home, and increase your chances of becoming debt free, you should definitely establish a household budget.
Setting a simple budget isn’t terribly hard. Simply determine all your current monthly and irregular expenses, including debt payments, along with the income you have coming in. Then, determine how much money you have left over after paying your bills; the surplus cash flow should be allocated to things such as retirement savings, emergency fund buildup, and additional debt payoff.
You may find that after accounting for all your monthly bills and payments that you don’t earn enough money to cover them all. This may have been why you relied so heavily upon credit cards and is probably a key reason you accumulated so much debt in a short period. If that’s the case, you’ll have to look at ways to decrease your spending to get your budget in alignment. You may also want to consider a side hustle, or some sort of part time job, to increase your monthly income.
Once you have a budget, it’s crucial that you follow through with it; a piece of paper with numbers on it does you no good if you just disregard it at every turn. Set a time each month to assess your budget and determine how well everyone in your household is adhering to it. If you find yourself straying from the spending and savings goals you’ve set, consider modifying your behavior or adjusting the budget to reflect conditions you hadn’t accounted for earlier. A good budget-monitoring process will help you avoid using those credit cards and keep you on track to paying off all your debts.
Prepare for an Emergency
Are you prepared for a sudden unexpected emergency that requires an immediate cash outlay? Most people are definitely not ready. Only about 60% of us have $1,000 or more in the bank to deal with an unexpected expense. Even if you have it, most medical and automobile emergencies will burn through $1,000 quick. Dealing with these kinds of expenses is another reason so many Americans continue to accumulate so much debt. If you don’t have the money in the bank, you’ll have no choice but to rely upon credit cards. So, if you want to be ready to avoid charging up those credit cards when disaster strikes, start building up an emergency fund.
When it comes to preparing for the unexpected, you should try to accumulate about two weeks worth of pay in your savings account. A modest amount of funds on hand like this can help you deal with immediate crises, such as a car problem or an unplanned bill. Over time, however, you should also attempt to save enough funds to mitigate the effects of a major financial crisis, such as the unexpected loss of a job, or the collapse of a business. Each person will have to determine exactly how much on hand is required for this. Having sufficient cash on hand can help you weather a crisis, avoid additional credit card debt, and give you the time and space you need to get yourself back on track.
Additionally, after you consolidate all your credit card debts, you may also want to take actions to lower your exposure to unexpected risk. Paying for additional insurance coverage–for your home, car, healthcare, or business–can limit the impact an unexpected event has on your overall financial situation. In many cases, the insurance coverage will help you rely less upon credit cards to endure a crisis and give you greater peace of mind as well. Talk to a trusted insurance agent when you have an opportunity and see if additional coverage is the right choice for you and your family.
Monitor Your Credit
How is your credit these days? If you don’t know the answer to that, you definitely should find out. If you accumulated a significant amount of debt, chances are strong that it affected your credit rating. Approximately a third of all Americans have bad credit, meaning a FICO score of 601 or lower, according to a 2016 study. After you consolidate your credit card balances into a new loan, monitoring your credit should become a key part of your plan to becoming debt free.
Poor credit could affect your ability to make important purchases later on, such as a new home or car. It might even affect future paychecks as well. In some circumstances, potential employers could do a credit check to determine your suitability for a certain job. This is especially the case with federal employment, and jobs in departments and agencies related to national security in any way. So, start monitoring your credit as soon as you can.
It’s simple to monitor your credit. For starters, you’re eligible for one free credit report every 12 months from each of the three major bureaus. This detailed report will help you determine everything that’s helping or hurting you when it comes to how you handle the credit and debt in your life. Additionally, many banks and financial services allow you to monitor your credit score in real time, so you can determine if anything you’re doing (or not doing) is harming your credit.
Keeping track of your credit is especially important after you’ve obtained a debt consolidation loan and transferred credit card balances into it. The entire debt consolidation process, from applying for a loan, transferring your debt balances to it, and making monthly payments, can affect your credit in several different ways. Some actions, such as the hard credit pull for the new loan, or being declined by a lender, can negatively affect your credit score. Other activities, such as bringing your credit cards to zero balances and consistently making your monthly loan payment on time, can help your credit. Monitoring your credit throughout this process will help you know when everything is going just fine, as well as when you need to make adjustments to prevent your score from taking a dive.
Prepare for the Aftermath
Once debt consolidation is truly underway, you should start thinking about how your family is going stay out of debt. The debt consolidation loan is just a tool to help make paying back your debt easier. Staying debt free is an entirely different story; it’ll require significant changes on your household’s part if you’re going to keep yourselves from accumulating a mountain of debt again. So, start preparing for the aftermath of paying off all those credit cards.
If you enlisted the help of credit counselors to help you plan how to use your debt consolidation loan, get back with them. A good credit-counseling program can help you determine habits you need to change in order to remain debt free. Many credit-counseling programs can help you discover more ways to save money or use the program more effectively. In many cases, they can help you eliminate the reasons you relied upon credit cards in the first place.
When it comes to credit counseling, make it a family affair, too. Your spouse and you should both actively participate in the counseling, as well as any other family members you deem mature enough to understand the topic. Having everybody listen to the advice will give your household the tools it needs to stay free from debt. It’ll also help establish greater buy-in to your efforts to pay off your household debt, and reduce the chances of anyone using credit or store cards unnecessarily.
If you remain disciplined throughout the debt consolidation process, a day will come when you’ve paid off all your outstanding credit card debts and the debt consolidation loan. What will you do then? You’ll want to avoid getting into the problems with credit cards that made a debt consolidation loan necessary in the first place, of course. However, how do you want to live once those debts are all paid off? If you haven’t started thinking about these things, you should.
If you don’t have any significant debt payments, you should be able to invest more money than you could previously. You should start saving for retirement; if you’re older and have thus far failed to do so, you may want to allocate extra funds to your retirement savings in an effort to catch up. You’ll almost certainly have to readjust your budget again as well; with all your debts paid off, you may have a little more cash each month to do things you like to do but couldn’t afford to do in the recent past, such as a night out to dinner or a trip to the movies.
Finally, once you’re debt free, you may want to reconsider your long-term goals in life. It may have been difficult to imagine what you were going to do in the future when you saw no way to pay off your debts. However, now that you’re doing it, maybe some of those goals you had when you were younger are options once again. If you’re debt free, perhaps retiring early or pursuing a second career is back on the table. Maybe you can downsize your home, live more frugally, and pursue travel and other opportunities that were previously unfeasible. So, start thinking about the possibilities, because you may be setting the conditions for them as you pay off your credit card debts.
Watch Those Credit Cards and Get Some Help
Debt consolidation can be a powerful tool to help you get your credit card debt in order and make it more manageable. However, a debt consolidation loan in and of itself won’t make you debt free. If you want to improve your financial situation for the long term, you have to address the root causes that led to you accumulating all that credit card debt in the first place.
Changing your mindset about credit cards and their usage will be critical to paying off your debts. If you consolidate your current debts, only to start using the credit cards whose balances you rolled into your loan once again, you’re never going to be free from debt. Obtaining new credit cards after you’ve consolidated your old ones is equally problematic. Stay cognizant of your credit cards, keep them at zero balances, and avoid new credit as soon as you gain approval for your debt consolidation loan.
Finally, as emphasized repeatedly throughout this article, you should never go it alone when it comes to dealing with excessive credit card debt. Seek out a trusted financial advisor as soon as you decide to use a debt consolidation loan. Once you take concrete action, such as bringing your credit cards to zero balances with the new loan, don’t forget about those advisors. Continue to seek out their guidance and support, so they can help you make good decisions about managing your credit cards, protecting yourself from financial risk, and improving your credit score. Good advisors can help you manage current debts, help you avoid new ones, and help get you on the path to being debt free forever.