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Consolidating your debt can be a great step toward taking control of your finances. But it’s just the beginning. There are things to do after consolidating debt that are just as important as making the decision to consolidate. By sticking to a strong follow-up plan, you can help ensure you accomplish your financial goals.
Here’s what you should do once you’ve consolidated your debt.
5 things to do after consolidating debt
Use this list to stay disciplined so that your debt consolidation strategy helps you get out of debt efficiently.
1. Check that your old debt was paid
Once you’re approved for a debt consolidation loan, you’ll either be given a lump sum to pay off your remaining debts or your new lender will disburse your loan to pay off your existing debt. Make sure you’re clear with your lender on how this process will work in your particular situation.
If your lender is disbursing the funds for you, you’ll need to follow up with each of your former lenders individually to make sure your debts were officially paid. Keep copies of all paperwork proving you’ve paid these debts.
What if you’ve received a lump sum? Then it’s your responsibility to pay your individual debts. Again, remember to get paperwork proving your payment. You could be required to submit it in the future if, for any reason, your old loans don’t come off your credit report. You might not notice an immediate change in your credit score after consolidating debt, but you’ll want to keep your paperwork in case you need proof of payment in the future.
2. Review your new lender’s policies
While you should definitely compare interest rates before you get a consolidation loan, there are a number of logistical things to do after consolidating debt that are just as crucial. Don’t make the mistake of assuming that your new lender will have the same fees and conditions as your previous lenders. This might not always be the case and not getting familiar with your new loan policy is an easy way to make a mistake. In particular, make sure you understand these important aspects of your new loan.
- Late payment fees: Will you incur a fee if you pay late? What’s the grace period?
- Payment schedule: What day of the month does your lender expect you to pay? Is there any flexibility with this? What should you do if an emergency arises and you can’t pay?
- Early repayment fees: Will you be penalized if you want to repay your loan ahead of schedule?
Answering these questions will help you stay current on your new debt and avoid unnecessary fees.
3. Create a foolproof payment strategy
Sometimes life gets busy and unexpected expenses arise. It’s entirely possible that you could simply forget to pay your new loan on time, or run out of money for your next payment because you’ve spent it elsewhere. One of the most important things to do after consolidating debt is to make sure that this doesn’t happen to you and that you’re making consistent, timely payments each month.
There are two ways you could do this. The first and simplest is to sign up for automatic payments. Some lenders could even give you a small discount on your interest rate if you sign up for automatic payments, so inquire about this option before you get your loan.
If the thought of automatically having money withdrawn from your account each month makes you nervous about how you’ll plan cash flow on a budget, you can opt for manual payments. Just make sure you don’t fall behind on these. It’s a good idea to create a calendar reminder to keep you on track.
4. Reorganize your budget
Did consolidating your loans free up more cash for you each month? Great — now it’s time for you to take another look at your monthly budget and shift some line items around.
Instead of spending this extra cash, decide where it’ll be most useful to strategically allocate it. You might want to use extra cash to help you start saving for retirement or to help you repay your loan early.
If you want a more robust budgeting solution than entering items into a spreadsheet, try a tool such as Mint, which can help you track your spending and saving, plus send you alerts to help you reach your goals.
5. Start an emergency fund
One of the other important things to do after consolidating debt is to start saving for an emergency fund. This is a crucial step toward achieving financial stability. How big should your emergency fund be? The answer will be slightly different for everyone but a good number to aim for is enough to cover your expenses for at least the next three months.
If you don’t already have a savings account, it’s time to open one so you can begin contributing with each paycheck to build your emergency fund. Even if you feel like you’re not contributing much, something is better than nothing.
By using your emergency fund to pay for expenses such as car repairs, illness or periods of unemployment, you could possibly avoid adding additional debt to your life when circumstances don’t go as planned.