According to a recent TransUnion study, approximately 43 million credit cards are currently used in Canada. In case you have the following question: Canada’s current population is approximately 35 million, which means that there are more credit cards than Canadians. When there are so many credit cards circulating, ready to be used, debt problems are self-evident. Currently, the average Canadian has a balance of approximately $ 4,094 for one or more credit cards. Credit card indebtedness seems to have become an essential part of most Canadian adults’ lives, but fortunately the problem can change. While we will always be the first to say that it is easier to go into debt than to save, there are countless options for those seeking to regain control over their expenses and indebtedness. Debt consolidation is one of those options.
What is a credit card debt consolidation?
Credit card debt consolidation is when you have balances on multiple high-interest cards and want to consolidate or combine all of these balances into one easy-to-manage and more affordable payment. There are several ways to consolidate your credit card debt, here are the details:
Debt consolidation options for your credit cards
When it comes to consolidating your credit card debt, you have several options that can help you regain control of your finances and get a better debt free future.
Debt consolidation loan
The most common form of credit card debt consolidation is probably an unsecured personal loan. Depending on the amount of your credit card debt, you can apply for an unsecured loan to pay off the balances you have on your credit cards. For people with bad credit, this option may not be the best choice. One of the most important parts of debt consolidation is to be approved for a lower interest rate so that your hard earned money goes directly to repaying your debt rather than interest charges.
Unfortunately, the fact is, if you want to apply for a large secured loan with a low interest rate to pay off your credit card debt, you must have a credit rating above average. Remember that this is not the case for all unsecured loans. You will probably have more difficulty getting approval if you plan to apply for a loan of $ 30,000 or more and your credit rating is below average.
Debt Management Program
A debt management program, on the other hand, is a good choice for those with significant credit card debt to consolidate. The purpose of a debt management program is to consolidate all your eligible debts, in this case, your credit card debts, into one affordable monthly payment. A debt management program is a great option for those who are interested in seeking the help of a professional. You will work with a credit counselor who:
- Assess your financial situation
- You will find a personalized plan
- Negotiate with your credit card providers to see if they can lower your interest rates or eliminate penalties that may be imposed on you
You will make your monthly payments to your advisor and he will then distribute the money to the appropriate credit card company based on how much you owe him and the agreement you have made.
Credit card balance transfer
A credit card balance transfer is when you transfer balances of all your credit cards to a new credit card at a lower interest rate. The drunk of this is to save on interest charges and pay off your debt as soon as possible. There are two questions you need to consider if you decide that a credit card balance transfer is the best option for you.
1 You must make sure your new credit card has a lower interest rate than all your other credit cards. If you simply transfer your balances to a card with the same interest rate, the only benefit is that you will need to make only one monthly payment instead of several.
2 The biggest problem you need to be aware of is the fees associated with balance transfers. The majority of credit cards charge a fee for balance transfers; Generally, this is a percentage based on the balance you are transferring.
However, it is possible to opt for this option at a very low cost. In Canada, there are balance transfer credit cards that offer low fees and an introductory interest-free period for new customers. This means that you could potentially save a lot of money if you are able to pay off all your debts during the interest free introductory period. Generally, credit card companies offer a six-month interest-free period, but keep an eye on bids, we have seen some cards with an interest-free period for a full year.
Line of Credit or Home Equity Loan
If you are a homeowner, you can use the capital you have accumulated by repaying your mortgage to obtain a loan or line of credit. Since you are going to put up collateral to guarantee the loan, you will not only have a better chance of being approved, but you will also have access to a larger amount of money, depending on how much capital you have accumulated. Interest rates are often considerably lower than other debt consolidation options.
When you use a home equity loan or a line of credit to consolidate your credit card debt, this is the same operation as an unsecured debt consolidation loan.
- Reimburse high interest credit cards
- Focus all the attention and finances to pay off a single loan, instead of multiple cards
- Save on interest
- Get out of debt as soon as possible
It is important to consider the consequences of setting up your home as a guarantee to pay off a consumer debt. Since a home equity loan or line of credit is guaranteed by your home, you risk losing it in the event of default.
Repayment of your debts
Remember that when consolidating your credit card debt, your debt still exists. Debt consolidation does not make your debt go away. It is only moved to give you a better chance of paying it back. This means that after subscribing to an unsecured loan or transferring all your balances to a single card, you will still need money to pay back what you owe.
Friends and family
This can be a good time to ask for help from your friends or family members if you are having trouble getting the money to pay off your debt consolidation. Of course, borrowing money from a friend or family member means that you will always be in debt, but if you choose someone with whom you have a very open, honest and trustworthy relationship, you may be able to find an agreement that could significantly reduce the stress that your debt puts on your finances.
Another great way to offset some of the cost of consolidating and then repaying your credit card debt is to sell assets. Of course, this can be a valuable asset that you have but do not need or use anymore. Make sure you do not sell something you really need and that you will be tempted to buy back once your debt is repaid. This could kick you into the vicious cycle of bad spending habits that took you into debt in the first place.
Live more simply
By effectively reducing your lifestyle, you can still have more money available to repay your debt after you have consolidated it. Downsizing can range from eating less at the restaurant to selling your home and buying a less expensive one. Obviously, it depends entirely on your screw style and the debt you have to pay. We do not recommend that everyone with a credit card debt sells his house. But if you have a large debt that needs to be dealt with quickly, it could not only help you, but also make your life easier to manage, and could be a good option for you.
Why consolidate credit card debt
There are many reasons why someone would have accumulated an immeasurable amount of credit card debt. Whether it is irresponsible spending on unforeseen expenses. When life goes on, sometimes we have to turn to the easiest and most convenient way to borrow money; our credit cards. Debt consolidation is one of the best options for those who have overused their credit cards, for whatever reason. Here are some of the most common reasons why someone might want to consolidate their credit card debt.
- To simplify your finances by reducing the number of monthly payments to stay on track
- To get a lower interest rate and save money
- Because the debts have become too important
- As an alternative to more drastic options such as consumer proposal or bankruptcy
- To get out of debt the fastest
Consolidation of credit card debt and your credit rating
The effect of credit card debt consolidation on your credit rating depends on the option you choose. In general, debt repayment is always a good thing, and eventually you will be rewarded with an improved credit rating. However, it is important to keep in mind that some debt consolidation options will negatively affect your credit rating, especially a debt management program.
A debt management program will be visible in your credit file for 3 years after repayment of your debts in full. Each of the accounts that were part of your debt management program will receive a rating of R7. Both of these factors could affect your ability to obtain loans and other financial products in the future.
Positive effects of credit card debt consolidation
If you choose a debt consolidation loan or a balance transfer to manage your debt, your credit rating will begin to improve, not necessarily immediately but quietly. The good thing is that you do not have to make big changes to start. Of course, it depends on how much debt you have to pay and what you think is the best option for your current financial situation.
Use of credit
When credit enhancement is discussed, payment history is often given great importance. While it is a good idea to make your payments on time, there is another factor that affects your credit rating just as much. This is your use of credit; how much you use compared to how much you have available to you. If you have $ 20,000 of credit available on your credit cards and you are constantly using almost all that credit available, your credit rating will not benefit. When you consolidate your credit card debt and start paying it off, your credit utilization rate will go down and your credit rating will increase automatically.
Be free from any debt versus your credit rating
Once everything is said and done, being debt free is one, if not the best, thing you can do for your future. If you currently have a lot of credit card debt that you want to pay back once and for all but are afraid of how it will affect your credit rating, answer the following question: Is a rating High credit is really more important than being debt free?
Credit Card Debt Consolidation Tips
Choosing the right debt consolidation option and then going through the process can seem like a daunting task and we understand why. Debts are not fun. To help you make informed decisions, here are our best credit card debt consolidation tips.
- Choose a fixed payment plan to know exactly when you will be debt free
- Choose only one option that you can afford and that will not cause you additional financial problems in the future
- Reconsider your lifestyle, your income and your financial management style
- Consider choosing the option that will free you as soon as possible (this will save you money on interest charges)
- If you use a debt management program, work only with a trustworthy company that you feel comfortable with.
Manage your finances after a debt consolidation
The first thing that many consumers do after consolidating their is to recreate more debt. Once you have gone through the ordeal of consolidating your credit card debts and having them repaid, it is extremely important to change your spending habits so you do not return to the same place.
Here are some steps to take after completing a debt consolidation:
- Prioritize your expenses
- Remove the expense triggers
- Learn to say no
- Replace shopping with a more productive activity
Choose what is best for you
A credit card debt consolidation is a great way to regain control over your expenses and finances but if you do not choose the right option for your needs, you may have problems taking full advantage of the chosen option. We can help you find a professional who will help you and guide you through the process.