How To Consolidate Your Debts in Texas

Collect the Details About Your Debts

Doing a debt consolidation can provide debt relief to people who have enough money to pay all of their debts. But, they don’t have a good system in place for paying on time every time and could benefit from a lower interest rate on some of their debts. One of the best ways to learn the details about your debt is to get a free copy of your credit report. Federal law says that you can get one free credit report from each one of the three credit reporting bureaus every 12 months to see your credit history and any record of late payments. It will also show you the different types of debt such as revolving or fixed debt. It’s also important to know your credit score to look for the best loan interest rate. Review your most recent two to three bank statements to see a record of your expenses each month. Your last two years of income tax returns are also useful documents in gathering information about your debt. It’s also good to see if any of your debt is secured – meaning if you don’t pay the debt, the creditor can take something like your car. Other debt may be unsecured – meaning there is nothing the creditor can take without first getting a judgment if you stop making payments, like unsecured loans such as private student loans. Collecting details about your debt is a very important first step in doing a debt consolidation.

Determine Your Monthly Income

A Texas debt consolidation is better if you have a steady income that doesn’t fluctuate a lot such as commission and you’re not relying on overtime pay to meet all of your expenses. If your income changes, it’s hard to know if you can cover your living expenses and also have money left over to pay the monthly payment to consolidate your debts. Income is not just wages. Non-wage earners may have income from sources such as Social Security, veteran’s benefits, worker’s compensation, etc. If your income comes from any of these sources, a Texas debt consolidation loan is an option for you as well. To determine your monthly income, review your two most recent paycheck stubs. Make sure the paycheck stubs you use represent a typical work week. How often you get paid is very important. Are you getting paid every two weeks (also called biweekly)? Do you get paid semi-monthly – meaning twice a month on a set date like the 15th and end of the month? If you get paid every two weeks, then you can’t take that check and multiply it by two to get your monthly income. This is because you get a total of 26 (not 24) paychecks a year. So, to figure out your monthly income if you are paid every two weeks, you will divide your total yearly income by 26 pay periods. You can find out how frequently you get paid by looking at your paycheck stub. 

Put Together Your Budget

A budget is a written document that shows how much income you have and what you pay out for debts and expenses. The key to a successful debt consolidation or debt management plan is to have enough money left over to make the monthly payment after you pay expenses. A common mistake in adding up monthly expenses like gas, groceries, and laundry, is to leave out things that happen every so often, but not every month. This could be things like your annual registration fee, fishing license or wholesale membership (e.g. Costco). These expenses need to be accounted for in your monthly budget. Let’s say you pay $50 a year for your annual Costco membership. To determine how much you pay in a month, you divide $50 by 12 months, which is $4.17 per month. Not including these payments, makes your income after expenses look higher than it actually is. So, be very detailed and include all expenses in your monthly budget to see how much money is left to pay creditors. If you have no, or very little, money left over, debt consolidation is not a good option. Some online tools to help you create a budget are apps such as Mint or Albert. You can also find online spreadsheets or other budgeting tools provided by your bank or credit union.

Do the Math

After collecting your debts and determining your monthly income and expenses, you can now do the math to figure out your monthly payments to creditors and for how long until your debts are all paid off. You can divide your total debt amount by 60 to see what your monthly payment would be if your plan is to pay off all debts in five years (divide by 120 for 10 years). Also, determine the amount of debt you have compared to your income. This is known as a debt-to-income ratio, which factors into your credit score. The ratio should be below 30% to have a good credit score, which will be useful when you talk to a potential lender about a Texas debt consolidation loan. Debt consolidation works in many ways. You may choose to refinance your mortgage to get a home equity line of credit (HELOC). Consolidation might be doing a credit card balance transfer, unsecured loan, or a debt management plan or DMP. Each option has risks – some greater than others. Keep in mind that with any type of loan you will have to pay what is known as an origination fee. This means the lender will take some of the loan funds off the type for doing the loan (e.g. paperwork, reviewing your credit). There are certain debts you want to leave out of your consolidation like mortgage debt (to avoid losing your home), student loans, and car loans. Also, loans from family or friends can be left out of your debt consolidation. 

Review your Texas debt consolidation options

Texas residents have several options to consolidate debt. A credit card balance transfer is one option where you can consolidate debt if you have good credit. It can be risky if the promotional period offering low or no interest rate for the new credit card if shorter than the time you need to pay. You could also end up paying a higher interest rate than you are currently paying. Another option is a home equity line of credit (HELOC) where you refinance your current mortgage and pull out the equity in your home to consolidate your debt. You risk getting an adjustable-rate mortgage and you end up with a higher interest rate than your current one. Plus, you pay for appraisal, origination fees, closing costs, etc. like you did with your original mortgage. The greatest risk is losing your home if you default on the loan.

An option with the lowest risk is an unsecured debt consolidation loan with a trustworthy lender.  Avoid using offers received through the mail which can be risky. A debt management plan also has fewer risks than some of the other options. Your accounts will typically be closed as part of a debt management plan.  It is risky because it impacts your credit score and limits your available credit. No matter how tempting, avoid pulling money out of your retirement to pay off your debts. If you do, there will be taxes and fees.

There are debts that Texas residents should exclude from debt consolidation like real property debts (e.g. mortgage), student loans, secured debts such as car loans, and interest-free loans from family and friends.  These debts typically have low or manageable interest rates and repayment options. Paying them back through a consolidation loan could cost you more. 

Apply for a Texas Debt Consolidation Loan

If you decide to apply for debt relief through a Texas debt consolidation loan, avoid using lenders who send you offers in the mail. Also, do not deposit any “checks” you get in the mail. Remember if a debt consolidation offer sounds too good to be true, it probably is. If the potential lender is calling, sending letters, or emailing you monthly or even weekly, they are someone to avoid. Legitimate organizations do not ask for money upfront. A way to know if a lender is trustworthy is to check with the Better Business Bureau or the Texas attorney general’s office. However, keep in mind that you can look at a debt management plan (DMP) as an alternative to getting a loan. A free nonprofit credit counseling agency can help you develop a debt management plan, so you don’t have to go into more debt by taking out a loan. 

How to Stay Current with Payments After Consolidating Your Debts in Texas

Staying current with your payments is the key factor for Texas debt consolidation loan success. What things can help you with making timely debt payments? If you get paid semi-monthly, schedule the payment for the 16th if you get paid on the 15th. Avoid paying your loan when monthly payments are also due for your rent/mortgage. If the payment due date doesn’t work after a few months, ask the lender about changing it. Setting up automatic loan payments through a bank or lender is a great payment plan as it helps you avoid penalties or late fees for missed or late payments. Keep tracking spending and plan for emergencies or large one-time expenses, so your financial situation remains positive. Also, make extra payments when you can by taking part of an income tax refund or birthday money, while also setting some money aside in an emergency fund. Build-in some rewards for staying current with your debt consolidation loan.