What are my credit card consolidation options?
When you decide to pay down your debt, what is the best course of action? In theory the most effective way to pay down your debts is to consolidate them. This gives your payment the most power and also increases your cash flow, which helps you to live within your means.
“When you have multiple credit cards and are making minimum payments only, those payments are just a drop in the bucket. Minimum payments are structured so the bulk of the payment goes towards covering interest charges, with only a portion going to actually reduce your debt principal. It can take months or even years before you are able to pay the debt down. When you spread that over multiple cards, you could be looking at carrying debt for quite some time,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
In many cases, consolidating your credit card debt results in a lower interest rate, which means you save lots of money in interest charges. Also, consolidating your debt into a single payment will simplify your life. You’ll be more organized and more likely to pay your credit card debts on time.
Are you drowning in debt? Consolidating your credit cards is a strategy that works. Wondering what your credit card consolidation options are? Call us at 1-888-294-3130 or visit our free online debt analysis.
There are a number of ways that you can consolidate your credit card debt in Canada. The strategy that you choose has a lot to do with how much debt you have, what your income is and what your personal and financial situation is. Here are the available credit card consolidation options:
DIY Balance Transfer
If you have a credit card with available room, doing a balance transfer that combines all of your debts into one is a good option. If you qualify, you could consider opening up a new card to transfer the other card balances to.
“If you are doing a balance transfer, make sure you read the fine print. Many cards promote themselves as ‘balance transfer’ tools, with a very low interest rate to entice you to open up the card. This low interest rate is usually for a promotional period. If you haven’t paid the debt off in that time period, then you could be on the hook for higher interest charges and other fees,” says Schwartz.
Debt Consolidation Loan
If you aren’t able to do a balance transfer, getting a debt consolidation loan from your financial institution is a good option. It gives you a single monthly payment to make, usually at a lower rate than most credit cards. As it is an installment loan, your payment will always be the same amount, split between interest and principal. It can be easier to budget for an installment loan as the payments are always the same. Also, if you have only had credit card debt up until this point, it can actually help your credit score to diversity your credit with an installment loan. Lenders like to see that you are able to handle and budget for different kinds of debt in a responsible manner.
Typically, a debt consolidation loan will take about 2-5 years (depending on how much debt that you have) before you are debt-free.
If you are a homeowner, it might be a viable option to consolidate your credit card debt into your home. This can seem like an attractive option because mortgage interest rates tend to be much lower than credit cards or installment loans. Be careful with this approach though, because there are lots of costs and potential risks involved.
First of all, you are converting unsecured debt to secured debt. That means if you default on this credit, you are opening yourself up to the possibility that creditors could take action against you to get their money back- which would come from the equity in your home.
There are a lot of costs involved with refinancing your mortgage. There are interest penalties (which can be substantial if you are a long way from renewal). There may also be appraisal and legal costs. While this can be a viable option, it is important that you fully understand what you are taking on when you refinance your mortgage to consolidate credit card debt. Make sure that you talk to a qualified financial professional that you trust.
Debt Management Program
If you are still able to make your payments, but could benefit from a longer timeline and other financial support, a debt management program may be a good credit card consolidation option.
With a debt management program, you work with a credit counselling agency. You consolidate your debts into a single monthly payment, which you make right to the credit counselling agency and they then distribute your payments directly to creditors on your behalf. Typically, your credit counsellor can negotiate interest rates and other charges way down on your debts in the hopes of making your debt payments more affordable. Also, if for some reason the debt management program is no longer suitable (e.g. you lose your job) your credit counsellor will contact your creditors to negotiate your terms.
When you are done, your debts are paid in full, which means that you can keep your credit from getting damaged further, if you’d been struggling to make payments on time previously. In most instances, debt management programs take between 3-5 years to complete.
Debt management is an effective way to become debt-free, not just because it erases your debt and it doesn’t matter what your credit score is; one of the cornerstones of a debt management program is financial literacy. You have access to real-life tools that can help you stay debt-free in the future. You learn all about budgeting, which is an essential framework for debt-free living.