Do-It-Yourself Debt Consolidation
Know your Options for DIY Debt Consolidation
Not all debt relief solutions require you to hire a specialist or enroll through a debt relief company. In certain circumstances, you may be able to use a do-it-yourself debt consolidation option to address your financial difficulties on your own. However, if you are not careful when using these financial options, you risk worsening your financial situation.
Do-it-yourself debt consolidation is not for everyone. If you review these options and decide you can’t proceed on your own, give us a call at 1-888-294-3130. A trained credit counsellor will review your circumstances for free and help you choose the right path forward. Or, if you prefer, you can get started online with a request for a Free Debt Analysis and a counsellor will get back to you.
DIY Consolidation Option #1: Balance Transfer
A balance transfer is where you take the balance on one or more of your high interest credit cards and transfer it to a credit card with a much lower interest rate. You can combine multiple credit card debts onto a single credit card with much lower interest, so you will only have one payment each month on your debts. On top of that, this payment is often lower than what you would pay on your debts individually.
In order to make a balance transfer successful, you need to have a strong credit rating to qualify for the right balance transfer credit card. With a strong credit score, you may even be able to apply for a card that offers 0% APR on balance transfers for an introductory period. This allows you to lower the balance on your debt faster, because 100% of the payments go to paying off the debt instead of accrued interest.
There are two main disadvantages you need to be aware of if using this as a debt relief option:
- If you do not have strong credit, you will not qualify for a low enough interest rate to provide a benefit. If the interest rate is too high, you can actually worsen your debt problems. If your credit is bad or fair, you may need to consider other options for debt relief.
- You must commit to avoiding credit until your balance is paid off in full. After transferring your balances to a low interest credit card, it is important to control your spending. With zero balances on your now debt-free credit cards, you may be tempted to start spending. Don’t let this fool you, these cards still carry a high interest rate. Before you know it, your balances will increase without having the transferred debt paid in full. You may find yourself further in debt, instead of decreasing it.
DIY Consolidation Option #2: Unsecured Debt Consolidation Loan
In this option, you consolidate your high-interest credit card debts with an unsecured personal debt consolidation loan. Taking out an unsecured loan allows you to use this money to pay off your high-interest credit cards. With the credit cards paid off, the only debt you have to pay off each month is on the loan. Once again, your goal is to get an interest rate that is low enough so that you are paying less each month but getting out of debt faster since the interest doesn’t accrue as fast.
Similar to a balance transfer, a lot of your success for this DIY debt option is attributed to having the right credit scores to qualify for a low interest rate. If your credit scores are low, you may not be approved at all, or, the interest rate will be too high to provide the benefit you are looking for. Again, you can make your financial problems worst if you use a DIY debt consolidation loan in the wrong circumstances.
Furthermore, you need to make sure you don’t increase your debts while paying off the loan. If you use your credit cards before you have the unsecured loan paid off, you will increase your debt rather than decreasing it, and you could again end up in a worst financial situation than when you started.
DIY Consolidation Option #3: Secured Debt Consolidation Loan
The last DIY consolidation option is similar to the second option, but you would take out a secured loan instead of an unsecured loan. This secured loan is often referred to as a home equity loan because your house is put up as collateral in case you don’t pay what you owe. Even though you can get a lower interest rate with weaker credit because the loan is secured, the majority of financial experts warn not to use this debt solution.
A home equity loan is a secured debt, so if you fail to pay the loan in-full, the creditor can take your security, putting your home at risk just so you can pay off your credit cards. This differs from credit cards that are unsecured debt; it means there is no security or collateral available.