How to Consolidate Your Debts in Utah

Collect the Details About Your Debts

First, obtain your recent credit card statements to know your full balance. Do this with all your household debt. Focus on the following information: interest rates, monthly payments, current outstanding credit card balance, and categorize the different types of debt into secured and unsecured. Examples of secured loans are car loans and mortgage(s). Unsecured loans include credit cards, personal loans, and student loans. It is also helpful to get your credit report to make sure all your debts are included and that there are no mistakes in your credit history. You can obtain a free credit report every 12 months.

Determine Your Monthly Income

Next, calculate your income to know how much you can afford to pay back. If your income is based on social security, know that is protected from your creditors (other than student loan creditors), so a debt consolidation may not be the best option for you. Also, it’s best not to rely on domestic support obligations like child support or alimony if you don’t reliably receive it every single month. Review your paystubs that are most consistent with a typical work week to avoid miscalculating your debt consolidation plan. If you are paid bi-weekly, multiply your bi-weekly income times 26 and divide the answer by 12 since there are 26 pay periods throughout the year. Inconsistent income such as commission-based jobs may make it difficult to determine how much you can afford each month so a debt consolidation plan may not be your best option. 

Put Together Your Budget

When calculating your budget, certain bills are the same amount each month such as your rent/mortgage, car payment, and car insurance. However, since other bills fluctuate monthly, it is important to review at least the last 2 to 3 months of bank statements to account for these expenses. This will also make for an excellent opportunity to find areas where you may be overspending. Remember to include expenses you incur every few months such as car maintenance and bills that are paid annually such as real estate taxes and insurance. Average the per month costs of these bills by dividing the full amount by 12. After you have calculated your expenses, subtract that amount from your income and that is the amount of money available to pay your debts. If you have a lot of money left over, confirm that you calculated your expenses correctly. Also, don’t forget to include payments for things like monthly dental and medical bills, personal loans from friends and family, and tax debts. If you don’t have disposable income available or even a negative balance, then a debt consolidation plan isn’t a good option since you can’t afford to pay back your debts. If there is sufficient money to pay back creditors, take advantage of online tools and apps such as Mint, Albert, spreadsheets like Excel, or any other tools including your bank’s budgeting program if any, to create your monthly budget.

Do the Math

Now that you know the balance of your debt and have calculated your income and expenses, it is time to do the math and figure out how much you can afford to pay towards your debt. Start by dividing the total amount of your debt by 60 to calculate a monthly payment plan of five years without interest. Compare that figure to your disposable income to determine if debt consolidation is the right option based on your financial situation. Also, figure out your credit utilization ratio which is determined by dividing the balance of your debt by the amount of your total credit limit. This is important for several reasons, including that your credit score is impacted by the difference of your balance and credit limit. Thus, the larger the gap, the better your score. Having a good credit utilization ratio (below 30%) could give you a stronger negotiating position when applying for a debt consolidation loan with a lender.

Review Your Utah Debt Consolidation Options

Now that you calculated your income, expenses, and the total amount of debt, review the different options available to you such as a credit card balance transfer, unsecured debt consolidation loans, home equity loans, and a debt management plan. With good credit, consider a balance transfer to other credit cards, but remember to read the fine print for any transfer fees or origination fee if it is with your home mortgage. Also, confirm the interest rate you will pay when the promotional period is over on your credit card to avoid an increase in your monthly payment. If refinancing your mortgage, ideally with a lower interest rate and lower monthly payments, note that in the long run it will be more expensive because mortgages are much longer than typical consolidation loans. If you’re using a home equity loan, be careful with so-called ARMs (adjustable rate mortgages) because the interest rate changes monthly, costing you more per month and making it more difficult to stick to a budget. You should also confirm if your lender has mortgage modification programs that will lower your monthly payment and interest rates. With a mortgage refinance, know that with a default on your monthly payment you risk facing foreclosure and losing your home. That’s why an unsecured debt consolidation loan offers the least risk, especially if you are using a lender you know you can trust.

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

Withdrawing money from your retirement account could result in additional fees and taxes, and if those funds aren’t replaced, you will have less money available for your retirement. If you ultimately file for bankruptcy, your retirement account would have been protected from creditors, saving you money in the long run. A similar result could occur if you pay off your car loan because Utah bankruptcy exemptions include $3,000 per vehicle for a single filer. By paying off a car worth more than $3,000, you may end up having to pay anything over that amount to the bankruptcy trustee who uses that money to pay back your creditors. Student loans should also be excluded as those debts can be negotiated separately, including a forbearance if you can’t afford to make your monthly loan payments, plus there are other repayment terms such as income-based payment plans.

Apply for a Utah Debt Consolidation Loan

When applying for a Utah debt consolidation loan, avoid lenders with aggressive sales tactics, mail offers from unknown lenders and lenders that require money upfront. If it sounds too good to be true, it probably is. Protect yourself and research with reputable organizations such as the BBB (Better Business Bureau) and the Utah Attorney General.

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

Timing is everything. Avoid your due date during the same pay period as your mortgage or rent so you aren’t left without money until your next paycheck. Have your monthly payments deducted automatically from your bank account to avoid spending money on late payments and late fees. Also, start tracking your spending habits and set aside funds for in case of an emergency. Use some of the financial budgeting apps and programs mentioned above. When possible, make more than the minimum payment to pay down your debt faster which will increase your credit score.