Understanding Debt Consolidation
When you are dealing with a mountain of debt, it can be difficult to determine how to chart a course to find your way towards debt free living. Part of the problem with dealing with debt is that it can be difficult to make ends meet, cover your living expenses and cover your debt payments.
Excessive unsecured debt has the potential to wreak havoc in your financial outlook. The debt cycle goes a little like this: 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 credit card debt in Canada is $1.64 for every dollar of income they bring in each month. Talk about spending beyond your means! Interest rates are climbing too, which adds another challenge in trying to be able to afford your debt.
Combining multiple debts into one is very effective strategy to help debtholders pay down their debt, manage their household budget and work toward keeping their credit healthy. There are different types of debt consolidation; which type suits you best depends a great deal on your personal situation and on the desired outcomes of your debt repayment plan.
Do I Have a Debt Problem?
Let’s start right at the beginning. Do you have a debt problem? Most people have a little debt, but how do you know when a little debt has turned into more debt than you can hope to handle on your own?
Some common signs are taking money from one credit card to pay another, avoiding the phone because you fear calls from your creditors, or avoiding your friends and family because you are ashamed or worried about your debt are all indicators that your debt has evolved to a point where you need to step up and take action.
Is debt consolidation the right action for you? Here is a breakdown of how debt consolidation works.
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 won’t accumulate as much interest, which means that it won’t grow as fast. This is crucial, because that could make a big difference in letting you get control of your debt and reverse direction of the debt cycle. Also, if you’ve been making multiple payments, you are probably finding it a challenge to get ahead. When you consolidate your debts, 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.
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 1-844-263-1050 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.
Debt Consolidation Options
Debt consolidation helps consumers who have lost control of their finances 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.
There are various ways to accomplish debt consolidation. Here is a breakdown of each option and how they work. Not every debtholder is eligible for each option, so make sure you have all the facts gathered before you make a decision. With debt consolidation you combine multiple debts into one low monthly payment at a much lower interest rate.
Here is how you can get back on the road to financial stability.
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. Or, perhaps you already have a card with a lower interest rate that you could transfer your other balances too. With excellent credit, you can even qualify for balance transfer credit cards that offer no interest payments for up to two years. Make sure that you read all the fine print to know exactly how interest is calculated on your card and when promotional interest rates expire. If you don’t know what you are getting into, you could end up with greater costs than you bargained for.
Also to note-this option is usually for people will lower debt, solid credit and good income.
Unsecured debt consolidation loan: You can also seek a consolidation loan from your financial institution. 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. Your credit counsellor will also help to teach you about budgeting to help you stay debt-free in the future.
What if I got Turned Down for a Debt Consolidation Loan?
As we’ve mentioned above, getting your debts consolidated through your lender isn’t the only way to consolidate your debts, but if you feel like that is the right solution for you, but were turned down for the loan, you may be wondering why.
There are a number of common reasons that your application could have been turned down. Usually it comes down to not having enough income to make the payments, having too much or the wrong kind of debt to include in the loan, or having too low a credit score to qualify.
If this has happened to you, you are well served to consult with a credit counsellor to see if some of the other debt consolidation options, like a debt management program (DMP) might be the proper debt solution for you.
Pros and Cons of Debt Consolidation
There are significantly more pros to debt consolidation than there are cons, but it is important to make an informed decision, considering all sides.
Consolidating multiple debts into one helps you to simplify your life and streamline your money management. It’s also easier to budget when you’ve got a set payment to deal with. Another major benefit of debt consolidation is the increased cash flow, which is an essential part of staying out of debt going forward. It’s hard to live within your means when the bulk of your income is going towards servicing debt. However, if you have increased cash flow, you can cover costs in cash and even direct some towards savings.
Making multiple minimum payments won’t get you much traction in actually paying down your debt, as much of a minimum payment goes towards servicing interest. Combining your debts into one lets you attack the principle of your debt more aggressively, which means that you’ll be able to pay it down faster as well.
You can often preserve or even improve your credit score by making these payments on time. Also, there is a good chance that your debt consolidation plan will have a lower interest rate, which means that you are ultimately paying less to borrow this debt.
There are a few drawbacks to debt consolidation. For instance, in many cases you may be required to close some (if not all) of your credit cards. If you’ve been used to using your credit card for the sake of convenience, that can be a challenge.
If you are doing a DIY consolidation (i.e. a balance transfer) or if you are allowed to keep your credit cards open under your debt consolidation repayment plan, there is the potential that you could rack debt back up again. If you did that, you’d be worse off than when you started, because you’d have the consolidated debt + the new credit card debt to pay off, which could spell financial disaster. It’s important that you try to adopt a cash based lifestyle as much as possible when trying to consolidate and pay down debts for that very reason.
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, if you let the debt cycle keep churning, 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:
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