Debt Consolidation

5 Things to Do After Consolidating Debt

Debt consolidation is the process of combining one or more high-interest debts from credit cards, student loans, medical debt, car loans and the like with a single lender. You may come out of it with a lower interest rate and potentially lower monthly payments on your outstanding debt.

But what should you do with your consolidated debt? Here are a few steps to consider to help make your repayment easier.

You’ve consolidated your debt — now what?

1. Set up automatic payments

One of the most important steps you need to take is make certain you make your payments on time. This is especially important if you took out a home equity loan to consolidate debt, since your home is being used as collateral.

But even if you didn’t put down collateral to consolidate debt, on-time repayment important. After all, your credit score could take a hit if you’re delinquent on payments and your lender or creditor reports it to credit bureaus.

The solution? Set up automatic payments with your bank to make sure you pay the bill on time every month. Virtually all banks offer this option on their website — all you need to do is click a few buttons. If your budget allows it, you should try to arrange a payment that is more than the minimum the loan requires. This will result in you repaying the loan faster and paying less interest over the life of the loan.

2. Review your loan terms and fees

Every loan has paperwork (even no-interest credit cards). Make sure you read it carefully and that you understand the terms of the loan. For example, you should be able to answer these questions:

  • What day of the month are payments due?
  • What is the minimum monthly payment?
  • Is there a penalty for repaying the loan faster than the terms require?
  • What is the grace period for making payments before a late fee applies?
  • What fees does the loan charge if you miss a payment or make the payment late?
  • In the case of a no-interest credit card, when exactly does the no interest provision expire?
  • At what point are you considered to be in default?

You should understand the answers to all of these questions. If you don’t, contact the loan officer who helped arrange the loan and ask for a clear explanation. Or call the 800 number that most lenders maintain and ask to speak with someone who can answer your questions. Having a clear understanding of the terms of your loan means there won’t be any surprises or unexpected fees.

3. Evaluate your budget

Every loan charges interest. Even if you secured a 0% interest credit card, the promotional period will eventually expire. The faster you pay off your consolidated debt, the less interest you will pay over time.

For example, if you take a $50,000 home equity loan at 5.25% for 20 years to pay off credit card and medical debt, the interest you pay will be more than $30,000 with monthly payments of $337. That’s more than half the amount you borrowed. But what would happen if you could afford to pay $500 a month? Or even $750? The interest on the loan would be cut significantly and you would repay it much faster than 20 years.

Look carefully at your budget and pay as much each month as you can reasonably afford. The best option would be if you could pay the same amount monthly as you were paying on your high-interest credit cards if that is within your means.

4. Reconsider your spending habits

Consolidating your debt only solves part of the problem. You may need to consider the behaviors that got you into debt in the first place. For example, high credit card balances don’t develop overnight. They can come from years of spending beyond your means — or they can occur after a financial emergency, such as loss of income.

Reviewing your bank accounts can give you insight into how you’re spending money. If you don’t have a budget, you can start one with a simple spreadsheet that lists out your recurring bills (such as rent, utilities and debt payments) and other more variable monthly expenses, such as the cost of groceries or entertainment. Then, you can decide where you can cut expenses so you can save money or at least avoid developing new debts.

If the thought of budgeting sounds daunting, you may consider reaching out for help. The National Foundation for Credit Counseling has resources that can help you manage your spending and set a realistic budget. Or you can consider hiring a financial planner to provide guidance.

5. Make extra money to repay your debt

Not everyone will feel the need to aggressively repay their debt. But earning extra money so you can make bigger payments can lower the total cost of your loan or ensure you repay your debt before the promotional period on a no-interest credit card expires. However, a higher monthly income could also mean you have the opportunity to pad your savings in case of a financial emergency.

Consider these ways you may be able to bring in extra cash:

  • Ask for a raise or extra hours at work (if you’re hourly)
  • Pick up seasonal work
  • Consider a side gig, such as driving for Uber or Lyft
  • Sell belongings you no longer need, such as by hosting a garage sale or selling on eBay

These steps can help you better manage your debt, repay it faster or help ensure you avoid developing new debts.


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