Understanding Debt Consolidation
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts at the lowest interest rate possible. Rather than paying different accounts every month, you only have to worry about one. Lower interest means your debt doesn’t grow as fast! More of each payment you make goes towards paying off the original debt owed, also referred to as principal debt, versus the interest accrued every month.
Excessive unsecured-debt has the potential to wreak havoc in your financial outlook. When you overspend on credit and depend too much on your credit cards to get by, you drive your credit card bills up. Eventually you get to a point where no amount of juggling is going to make ends meet. As a result, you end up facing financial distress, where you need more money to get by each month than what you actually bring in with your income. Excessive unsecured debt, including credit card debt, is the primary reason so many Canadian families are struggling, with the average debt-to-income ratio at 164 per cent. Effectively, the average Canadian family owes $1.64 for every dollar of income they bring in each month.
If you’re struggling with credit card debts and other unsecured debts, you’re not alone. We’ve helped over one million people just like you find the right debt solution for their needs. Call Consolidated Credit today at 1-888-287-8506 to speak with a trained credit counsellor or request a Free Debt Analysis online and a counsellor will contact you once your information has been reviewed.
How Debt Consolidation Works
Debt consolidation helps consumers who have lost financial control because of excessive unsecured debt. When your monthly debt payments increase to the point where you can’t afford to pay all of your bills, debt consolidation can provide the relief you need. With debt consolidation you combine multiple debts into one low monthly payment at a much lower interest rate. Since the interest doesn’t build as fast on your debt, you can get out of debt faster even though you pay less each month. You can eliminate your unsecured debts and get back on the road to financial stability.
You have a few options available when it comes to consolidating debt. The following provides a list of the most common ways to consolidate, as well as tips on how and when to use each option effectively:
- Credit card balance transfer: This is a do-it-yourself option for debt consolidation. You open a credit card with a low balance transfer APR and move the balances from your existing credit card accounts to the new card. With excellent credit, you can even qualify for balance transfer credit cards that offer no interest payments for up to two years.
- Unsecured debt consolidation loan: This is another do-it-yourself debt consolidation option. With good credit scores, you can take out an unsecured loan through your preferred lender and use the money to pay off all of your unsecured debts. With those paid off, the only unsecured debt you have to worry about is the loan.
- Home equity loan: This is a secured version of the loan described above; however, since the loan is secured using your home as collateral, you can qualify for a low interest rate even with weak credit scores. It’s important to note most experts recommend that you avoid home equity loans, since they unnecessarily put your home at risk to pay off your unsecured debts.
- Debt management program: This is the final option you have for debt consolidation. You consolidate through a credit counselling agency by enrolling in a debt management program. You pay the agency one payment each month and the credit counsellor negotiates with creditors and distributes the money on your behalf.
Deciding to Consolidate Your Debt
When you first start to experience financial hardship, one of the first steps you should take is to identify the root cause of your difficulty. Start by looking at your general debt-to-income ratio, as well as the ratio of your credit card debt payments to your monthly income. If your debt-to-income ratio is high and credit card payments take up more than 10% of your income each month, then credit card debt is likely to be a major contributing factor to your financial woes.
Once you’ve identified credit card debt as the problem, the next step is to determine the best way to regain your financial control. Start by using a debt calculator to determine how long it would take to pay off your debts following the minimum payment schedule. You can also use this calculator to determine how much it would impact your payoff dates if you can pay more than the minimum payment requirements. Coordinate these calculations with your budget to see if you can develop a strategy that allows you to reduce the debt quickly making extra payments.
If you can’t figure out a way to pay off your credit cards in the ways provided above, then your only option will be to find an alternative, such as debt consolidation. Otherwise, you will face severe financial hardship and eventual bankruptcy. It’s important to act as quickly as possible, since any damage to your credit caused by delinquent payments may limit the number of options you have available to use for consolidation.
More Information about Debt Consolidation
If you’re currently having financial problems because of excessive credit card debt, don’t wait to find the solution you need. The following pages may provide additional information to help you make the right choice for your unique financial situation:
- Should I Consolidate My Debts?
- Is It Time for a Debt Management Plan?
- Debt Management Programs vs. Debt Consolidation Loans