Today we have a Guest Post from Tom “FIRE” – a FI blogger who reached out to Old Mr. FireStation to see if he could share a little Millennial experience with our readers. Tom’s website is FIREdUpMillennial.com. His experience with getting too deep in credit card debt in your twenties is very familiar to my wife & I, and he offers a great approach to get out of it as effectively as possible …
Like many people, I got into credit card debt fairly quickly after I was approved for my first card early on in my 20s. The lure of spending on credit was just too strong. After many swipes on multiple cards, I found myself in a hole financially.
While credit card debt is a reality of life, the payments were becoming too much for me to handle. I talked to a couple friends, and one of them told me about how she refinanced and consolidated her debt with a personal loan.
It seemed too good to be true, and I was skeptical that more debt could save me. However, I was still curious so I dug a little deeper to see if it was a viable way to help myself get out debt faster.
Getting Back On Track
The first step in the process was controlling my spending. I made a budget and cut out anything non-essential. I canceled my cable, signed up for a cheaper phone plan, and stopped eating out (this was the hardest). Without spending as much, I had more money to pay down debt.
It sounds easy, but it actually took a little while to gain momentum with saving. After I curbed some of my spending, the next step was fixing my credit. From my friend, I knew that consolidation was an option, but I didn’t know how it worked at first. So, as any consumer nowadays would do, I hopped onto Google and started doing some research.
Doing the Research
Before I considered applying for a personal loan to consolidate my credit cards, I made sure to do my research ahead of time. One of the headliners for a debt consolidation loan was a lower rate.
It seemed pretty obvious, but I didn’t really understand much about the application process or who offered these loans. Luckily, there were lots of great resources available online. I was able to figure out plenty of ways that a debt consolidation loan could help or hurt me.
Personal loans are great if you want a simpler monthly bill; this would help people with multiple credit cards. I found out that a personal loan is installment debt, so it differs considerably from a credit card (revolving credit). I liked the idea that I couldn’t dip into a personal loan and add to the balance like I could with a credit card.
That brings me to my next point: the negatives. Like with a credit card, if you don’t curb your spending, then you’ll dig yourself deeper. While a personal loan isn’t revolving credit, you still need to pay it down without missing a bill because interest can still pile up. On the subject of interest, I also learned that you need excellent credit if you’re looking for a personal loan. The whole point is to get a lower interest rate and expedite repayment, but this isn’t possible if you have terrible credit.
I also learned about an alternative more my specific predicament: a balance transfer card. This could have been a solution, but it didn’t work for me. I preferred installment debt moving forward, not another line of credit. Also, I needed to consolidate multiple credit cards, and a balance transfer wouldn’t have covered all that debt.
Here are a few resources to keep in mind for your research. The Consumer Financial Protection Bureau is a good place to start learning about credit cards, consumer debt, and consolidation loans. There are also countless websites that exist solely to educate consumers. A few of my favorites include NerdWallet, LendEDU, and Credit Karma.
Making the Next Move
With the research out of the way, it was time to get moving on that personal loan. I made sure to shop around at different banks and lenders to find the best possible deal (I learned this through my research).
My credit score was pretty good at this time. It was a combo of cutting expenses and focusing on credit card payments, but I also had decent credit to start with. Having a clean credit report made it a lot easier to get a personal loan with a low rate, and I was helped out big time with my income.
After finding the right personal loan lender and going through the application process, I signed up for the new loan. This one had a fixed monthly payment over a two-year term. My monthly payment was larger than before, but I was able to handle it due to my “debt killer” budgeting from before. This was ideal for me because I was very happy with a two-year repayment plan. With credit cards, I wasn’t sure how long it would have taken me to pay everything off – especially with the spending habits I had developed previously.
After the term is up, my first credit card mistakes will be gone, and I’ll have saved almost $1,000 in the process since the personal loan has a considerably lower interest rate than my credit cards. It would have been smarter to not get into debt in the first place, but the personal loan helped me get a handle on my debt with a plan and a better rate.
More people can benefit from personal loans for consolidating their debt – I wish I knew about it sooner! Just beware of the various scams out there that have big headlines claiming to save your money through consolidating your debt. Make sure you choose a reputable lender with verified reviews of customers.
Tom “FIRE” runs his own personal finance blog centered around achieving Financial Independence and Retiring Early – hence the FIRE. You can follow his journey at his blog at FIREdUpMillennial.com and on Twitter @FIREdUpMillenn.