How to Consolidate Your Debts in Rhode Island

Collect the Details About Your Debts

First, find out who your creditors are and the outstanding balances on your accounts. You can do this by reviewing recent credit card statements and your credit report that you can get for free every year. If you find any mistakes when reviewing your credit history, file a dispute under the Fair Credit Reporting Act at no cost to you.

Next, categorize your debt into secured and unsecured. Examples of secured debts are car loans and mortgage(s). Unsecured debt includes credit cards, personal loans, medical bills, and student loans. As you review your debts, focus on the interest rates and monthly payments as this information will be needed when planning your budget.

Determine Your Monthly Income

Your income and credit card balances determine how much you can afford to pay back. With regular and consistent income, debt consolidation works best. However, commission-based jobs make calculating a budget difficult, thus, an unsecured debt consolidation loan may not be the right choice. Depending on child support or alimony payments can also make budgeting difficult.

As you calculate your income, include average paystubs. Watch out for paystubs with more overtime than normal. If not, you will end up with more disposable income and a payment plan you can’t afford. Remember, besides be debt-free, you want to get or maintain a good credit score, so you can’t default on your monthly payments.

If you are paid bi-weekly, multiply your net income times 26 and divide the answer by 12 since there are 26 pay periods in one year. Include income from your spouse or domestic partner, especially if you are both responsible for the credit card debt. If you receive Social Security income, a debt consolidation may not be the right option for you since your income is protected in a bankruptcy. 

Put Together Your Budget

Include all your bills and expenses in your budget. Separate your expenses into those that are the same amount each month such as your rent/mortgage, auto loans, and car insurance. Review several months of bank statements to find bills that fluctuate monthly like gas, groceries, and utility bills. Include expenses such as car maintenance that occurs every few months and annual bills such as your real estate taxes and property insurance. Forgetting to include these expenses will result in not having enough money to pay for it when it comes due. As a result, you may need to get into more debt because of it. To figure out the monthly average of these expenses, add up the full amount and divide that number by 12.

In reviewing your bank statements, analyze your spending habits. Can expenses be reduced? If so, use that extra money towards your monthly payments. Paying down your debt faster and paying more than the minimum payments will increase your credit score.

How much money is left over after calculating your expenses and subtracting that amount from your income? If you have too much money left over, review your income and expenses again for any mistakes. If you don’t have any money available or even a negative balance, then a debt consolidation plan won’t work since you can’t afford to pay back your debts. If you need help with a budget, use apps such as Mint, and Albert. Your bank may also have an online budgeting program.

Do the Math

Now that you calculated your income and expenses, it’s time to calculate your monthly payment plan. Get the total amount of your debt and divide that number by 60 to calculate a monthly payment plan of five years without interest. If you still have disposable income available after calculating your monthly debt total, consider a debt consolidation. Also, figure out your credit utilization ratio as that may help you when negotiating with your creditors. A good score is under 30% and is calculated by dividing the total amount of debt by your credit limit. 

If you don’t have money available after comparing your monthly debt total to your disposable income, continue reading to learn more about a debt management plan as an alternative way of consolidating your debts.

Review Your Rhode Island Debt Consolidation Options

Let’s review the different types of loans available to you. With good credit, a balance transfer to one or more credit cards is a good choice, especially if you are being offered a lower rate of interest. As mentioned before, find out the interest rate once the promotional period expires. Don’t assume you will receive more offers before it does.

If you have enough equity in your home, then a refinance of your mortgage or a home equity loan are both good options. To figure out the equity in your home, subtract the full amount of the mortgage balance from the value of your home. One advantage of a home equity loan is a lower monthly payment, but it will cost you more in the long run. If the bank offers an Adjustable Rate Mortgage, known as ARM, know that the interest rate changes monthly. This may increase your monthly payment making budgeting more difficult. If possible, apply for a mortgage modification program with your lender which may reduce your monthly payment. Find out in advance of any additional costs such as getting a property appraisal and loan origination fees.

If you don't qualify for a Rhode Island debt consolidation loan, then a debt management plan may be the right choice.

Why using your retirement account to consolidate and pay off your debt is a terrible idea

Think twice before using your retirement account to pay off your debt. Retirement accounts are protected from creditors in a bankruptcy case and there are tax consequences as well. Withdraws also result in having less money available for retirement. 

Also, don’t pay off your auto loan with a debt consolidation. Rhode Island bankruptcy exemptions protect a portion of the equity in your car. Any equity above the bankruptcy exemptions, the bankruptcy trustee could have you pay back. That money is then used to pay back your creditors. Since student loans can be negotiated separately, they shouldn’t be included in a debt consolidation. If you need to lower your student loan payments, apply for an income-based payment plan with the lender.

Apply for a Rhode Island Debt Consolidation Loan

If you are applying for a Rhode Island debt consolidation loan, start with lenders you know and trust. Your local bank is a good choice. Be careful of lenders that offer deals that sound too good to be true, as it probably is. Before you commit to a lender, research with trustworthy organizations such as the BBB (Better Business Bureau) and the Rhode Island Attorney General. Look out for high-pressure sales tactics, mail offers from unknown lenders and lenders that require money upfront. 

How to Stay Current with Payments After Consolidating Your Debts in Rhode Island

Now that you are tracking your spending habits and taking steps towards being debt-free, avoid certain pitfalls that will cost you money unnecessarily. The due date on your debt consolidation loan shouldn’t be during the same pay period as your larger expenses such as your mortgage or rent. You don’t want to be in a situation where you have little to no money available until your next paycheck. To avoid late payments and late fees, have your monthly payments withdrawn automatically from your bank account. Start an emergency fund or open a savings account with the money you are saving.