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Making a Plan

You work hard for your money, but is too much of your cash used to pay off credit card debt? A debt consolidation plan could be exactly what you need for a healthy financial future. These tips will help you take the first steps to paying fewer bills, and keeping more of your money in your pocket.

How much debt is too much?

Let’s face it – debt has become a major part of American life. And it can take all kinds of forms – credit card debt, student loan debt, medical debt, and of course a mortgage. The question is: do you have too much debt? The easiest way to figure that out is by measuring your debt-to-income ratio - which shows how much you owe versus how much you bring home in income. Ideally, you’d want that percentage to be less than 15% (not including mortgage or student loans).

If you have more than that – it’s time to start thinking about a plan to lower your debt-to-income ratio, and consolidate your debt to make paying bills easier. Here’s how to get started:

1. Loan to consolidate debt

It might seem strange, but a loan may be the best way to pay off bills faster. Let’s say you have three credit cards all with varying interest rates. Consolidating those credit cards into one loan means you have only one monthly payment instead of three, and you’ll likely pay less in interest. Here are some loan options for you to consider:

• Secured Loan - May be easier to get because it offers less risk to the lender. In exchange for the pledge of collateral, such as your home equity, a car or 401(k), you save with a lower interest rate.
• Unsecured loan - A good option if the amount you want to consolidate is not too large and you have good credit; or, if you don’t have any collateral readily available. Unfortunately, if you have excessive debt, an unsecured loan may be harder to obtain.

2. Use the equity in your home

If you’re a homeowner, a home equity loan or home equity line-of-credit (HELOC) can be an excellent choice for debt consolidation. Rates are usually lower than other types of loans, including personal loans and credit cards. Take a look at these options:

• Home Equity Loans (closed-end loan, fixed rate) – The loan is for a set amount and repaid in fixed monthly payments. It works well for debt consolidation or when you have a specific amount in mind to borrow. It may also be a good choice if you’re more conservative in your approach to debt.
• Home Equity Line-of-Credit (open-end credit, variable rate) – This revolving line is a convenient way to pay off other debt and can also be used for future needs. It’s an ideal choice if you want a continuous credit line that is replenished as you repay.

Home equity loans and credit lines are not only cost-effective but versatile. In addition to debt consolidation, you can use the funds for major purchases, home renovations, a special event, college tuition or even investments. Please consult your tax professional and there may also be potential for tax savings.

But it’s important to remember that because this loan is tied to your home, there are risks if you can’t make the payments.

3. Use the “snowball” method

National financial guru Dave Ramsey has made the Debt Snowball Method popular in recent years, and it’s perfect for people who have the extra income to put towards paying down bills. The basics of this method include paying the minimum payment on all debts, while paying extra on the debt with the smallest balance until you pay it off, followed by the debt with the next lowest balance, etc. It becomes a moral victory and enables you to reduce the total number of payments you’re juggling.

The downside? Paying extra on one debt, while keeping up with other multiple loan payments (and being on-time) can be tough, even for the most disciplined person.

The Bottom Line

If you find yourself in need of additional help on how to consolidate your debt, stop by your local United branch and speak with a Member Service Advisor. The most important thing you can have when consolidating debt is a plan of action. Once you find the solution that’s best for you, stick to it!