How to Consolidate Your Debts in Vermont

Collect the Details About Your Debts

In order to understand the full extent of your financial situation, gather your most recent statements for any credit cards or bills that you want to consolidate. Then, pause and think about whether you are aware of any debt that may have been sent to collection or may be billed to you in the near future. If possible, try to get information about those amounts as well. Remember: the point of this exercise is to calculate the full amount of any debts that you may owe so that you can figure out your best options. 

As you review your statements, create a list that notes the interest rate that you are being charged by each company, the amount of your monthly payment for each debt, and the total outstanding balance. You should also note whether the bill is current or overdue and whether you are being charged for any late, default, or collection fees. Then, you can further organize each debt by category, such as your auto loan, medical bill, home equity loan, mortgage, personal loan, credit card, student loan, etc. Because lenders treat certain types of debt differently, this information will be helpful to determine what debt can be consolidated and whether other options may be more beneficial for your circumstances.

The last document that you should request is a copy of your credit report. Your credit report reveals your credit history and will show you what companies are reporting about you. Reviewing your credit report will help ensure that you’ve taken all potential debts into consideration. The three credit reporting agencies in the United States are required by federal law to give you a free copy of your credit report every year – you just have to request it. For a fee, you can also purchase your credit score from the credit reporting agencies or check with your credit card company, which may provide that information for free. 

Determine Your Monthly Income

After you’ve determined your total debt, the next step is calculating your monthly income. You will use this figure to help set a budget. Knowing how your monthly income compares to your total debt will also help you decide whether debt consolidation makes sense.  

If you are a regular wage earner, determining your monthly income may be relatively straight-forward. If you know your annual salary, you can simply take the total amount you are paid for the year, and divide that amount by 12 to calculate your gross monthly income. Then, you need to determine the monthly amount that is taken by the tax man: the federal government takes approximately 18% for social security and Medicare, while the state of Vermont’s income tax averages around 6% for income less than $137,050. These numbers will fluctuate depending upon your income and whether you file separately or jointly, but a good rule of thumb is to assume that around 25% of your gross income will be paid in taxes. So, take the gross monthly income that you calculated, multiply that sum by .75, and the end result will be your after-tax monthly take home income.       

If you are not paid on a salaried basis, determining your monthly income may be a bit tricky. Take a look at your two most recent paystubs and determine how you are being paid. Are you paid by the hour? If so, use your best estimate of how many hours you work each week. Unless you usually work a reliable amount of overtime, omit any overtime from your calculation so that you don’t artificially inflate your income. Then, multiply your hourly wage by the typical number of hours you work each week, and then multiply that number by 52. The total you calculate should represent your average gross annual salary. Then, divide this number by 12 to find your average monthly income. For example, if you are paid $15 an hour, and you work 40 hours a week, your weekly gross pay would be $600. Multiplied by 52, your gross annual income is $31,200. And, then by dividing this number by 12, you would find that your average monthly salary is $2,600. Finally, ugh, you need to reduce this amount by approximately 25% (so, $650)  to account for taxes. 

If you occasionally earn a bonus, a commission, or overtime, you may find that your calculated average monthly income is slightly less than your true take-home pay. That’s fine because it’s better to be conservative with your estimates so that you don’t end up setting a budget that you can’t stick with. By the same token, only include alimony or child support payments in your income if you reliably receive payments.  

Put Together Your Budget

Once you’ve determined your total debt and monthly income, it’s time to see where you are truly spending your money each month and creating a budget for the future. Remember: the key to debt consolidation success is having a plan to prevent running up debt again and making a set payment every single month, reliably. So be honest with yourself when putting together your budget: you want to set yourself up for success. 

The first step to budgeting is identifying where you spend money each month. Hint: check with your bank or credit card company to see whether they have a tracking tool that can provide you with a monthly summary of your transactions. Otherwise, pull-out your three most recent bank and credit card statements and review your spending.

Every household has certain fixed costs that don’t change much from month to month. For example, your mortgage or rent payments, health or car insurance payments, car loans, cell phone or internet plans, and gym memberships. Itemize these fixed costs. Then, do the same thing for any variable spending that you have each month for things like groceries, gas, utilities, and entertainment. As you review these expenses, do you see any expenditures that can be reduced or eliminated? Are you surprised by the total cost of any expenses? If so, these might be areas of spending that you can cut. 

A good budget should also try to anticipate those pesky expenses that arise irregularly (like oil changes, registration costs, and haircuts) and set aside money for emergencies (like unforeseen auto repairs or vet bills). For those irregular expenses, tally-up how much they cost over the course of the year, and then divide by 12 to see what amount should be set aside each month for those costs. Once you’ve determined how much you spend on a monthly basis, consider adding 10% to that total in order to be prepared for any unanticipated expenditures. This way, you won’t be incurring new debt or running the risk of missing any payments if you are hit by a surprise cost to your budget.

Do the Math

It’s time to pull all of your work together. First, start by totaling how much money you spend on fixed and variable expenses on a monthly basis. Compare this amount to your total monthly income. Do you have any disposable income left at the end of the month? If so, debt consolidation may be a viable option. If you are spending more than your monthly income, then debt consolidation is not a good option unless you can revisit your expenses and see if there are any areas that can be dramatically reduced. 

Next, you need to take your debt payments into consideration. Take your total debt and divide that by 60 to determine a rough estimate of how much your monthly payment would be to pay off the total debt balance, without interest, in five years (or use 120 if you want to consider a loan term of ten years). For example, if you had $15,000 in debt, your estimated monthly debt payment would be $250 for five years in a best case scenario where your loan has a 0.0% interest rate. Refer back to your monthly income and expenses, if you have enough disposable income to include the loan repayment amounts, debt consolidation may be a good alternative. 

Review Your Vermont Debt Consolidation Options

Once you’ve determined that your cash flow can consistently cover payments toward your debt, there are a few different types of consolidation options with varying degrees of risk to consider. Credit counseling agencies offer debt management plans, which allow you to aggregate several debts into a payment plan that runs from three to five years. The credit counseling agency can generally get creditors to agree to reduce your interest rate, but the agency may charge you monthly or startup fees to administer the plan. Importantly, debt management plans can’t be used to pay for student loans, medical debt, or tax obligations.

If your credit score is good to excellent, you may be able to qualify for a credit card balance transfer at a much lower interest rate, perhaps even zero percent. If you have high-interest credit card debt, a balance transfer can be an excellent way to eliminate that debt - as long as you pay more than the minimum payment amount. However, credit card balance transfers can be risky because the promotional period may expire before you can pay off the balance, and the interest rate may skyrocket. In addition, credit card companies will often charge a transfer fee ranging from 2 - 3% of the balance being transferred. It can also be tempting to use the new credit card for new purchases, which may be counterproductive to achieving debt relief. 

Banks, credit unions, and online lenders also offer personal loans to consumers so that they can consolidate and pay off their debt. These loans typically have fixed interest rates at a lower rate than the default rate charged by credit cards. However, most loans include an origination fee and require that you have a good credit score. The lender may also require you to provide collateral, like your car or home, to secure the loan so that if you fail to make payments, the lender has an asset that it can collect.

If you own a home, you may also qualify for a home equity loan (or HELOC), which allows you to borrow money at a low-interest rate to pay off your debts. Home equity loans can be risky because your home acts as the collateral for the loan. If you fail to make payments, the lender may foreclose on your home. In addition, because home equity loans are a bit more involved, the lender will usually charge you closing fees (appraisal fees, origination fees, legal fees, etc.), which could add thousands of dollars to the loan amount.

Apply for a Vermont Debt Consolidation Loan

If it looks like a Vermont debt consolidation loan may help you regain your financial footing, make sure you are diligent in finding the right financial partner. Bear in mind that unsavory characters often gain access to credit reports, mailing lists, and court documents in order to target susceptible populations. For that reason, be leery of any offers that you may receive in the mail or of any unsolicited phone calls. When you are interacting with a potential lender, trust your gut: if a deal sounds too good to be true, it probably is. And, if the lender is aggressive or asking for money up-front, that is also a tell-tale sign that the organization may not be legitimate.  Any company offering debt settlement services to Vermont consumers must be licensed to do business in Vermont with the Vermont Department of Financial Regulation, which provides the public with a link to verify an entity’s license. 

You can also speak to an accredited Vermont credit counseling agency (look for an agency that’s a member of the National Foundation for Credit Counseling) in order to discuss whether a debt management plan is a better option and to obtain additional resources.  

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

You’ve done your homework, you’ve figured out your budget, you’ve consolidated your debt, now you just need to execute your plan to get free and clear of debt. Below are some best practices to make sure that your debt consolidation works.

Choose a payment date that you will remember. If possible, set-up automatic monthly payments through your bank or your lender so that your loan payments are always timely. If you have direct deposit, you may want to set-up a separate checking account for your loan payments and have your employer deposit a set amount from each paycheck into that account. Similarly, you may want to set-up another account for your “emergency funds” so that you have funds set aside for any unexpected expenses. Any remaining money from your paycheck, you would then use to cover your budgeted expenses or, if possible, make extra loan payments. 

Continue to analyze your spending and your budget. Make a distinction between spending on things that are basic needs (like safe shelter and healthy food) and things that are desires (like designer clothes and new technology). Try to spend money only on those things that you truly need. 

On the other hand, debt relief isn’t about depriving yourself of the joys of life. Set some milestones for yourself and reward your hard work when you reach those goals. For example, after you’ve repaid 25% of your loan, maybe you plan a celebratory dinner at your favorite restaurant, or a spa day, or whatever helps make you feel accomplished. Completing a debt consolidation program takes a great deal of effort, and you should feel empowered and proud of your performance.