Is it time to consolidate debt?

Despite your best efforts, you are barely putting a dent in your debt. Does this sound like you?

Maybe it’s time to rethink your debt repayment strategy. One option is to consolidate debt, but how do you know if debt consolidation is the smart strategy for your financial situation?

“Debt consolidation can be an excellent strategy to help you get out of debt and stay out of debt,” says Jeff Schwartz, executive director, Consolidate Credit Counseling Services of Canada. “One of the benefits of debt consolidation is that you centralize your payments. Typically, that means you can pay your debt down more quickly, because you are able to apply more money towards the principal of the debt itself.”

“Not all debt consolidation strategies are the same, so it is important for you to understand your options,” he says.

Is debt consolidation the solution to your debt problem? Here are some signs that you might need this strategy.

Multiple cards with high balances

Is your debt load comprised of multiple credit cards, many of which have high balances and interest rates? Are you making little more than the minimum payments? Furthermore, are you taking cash advances out on one card just to make payments on another?

If you consolidate all your credit card debt, you can have a single payment that is targeted at paying down debt. This will generally allow you to pay down the balance quicker.

You have a cash flow problem

One problem associated with having multiple debt payments is that you just don’t have the cash flow to cover all of them. You may be using credit just to make ends meet, because your debt obligations and living expenses exceed the money that you’ve got coming in.

“Consolidating debt will free up cash flow and address your debt obligations at the same time,” says Schwartz. “You will have cash on hand to live a cash-only lifestyle, as well as build up your savings, which will help you reduce the need to rely on credit for unexpected expenses.”

Options to consolidate debt

Depending on the nature of your debt, your credit history and your financial situation, there are a few ways in which you can consolidate debt.

If you have room on a lower interest credit card, you may be able to do a balance transfer so that you are dealing with a single payment. If you choose this option, make sure that you close the cards you transferred from.

If you have equity in your home, it may make sense to refinance your mortgage and consolidate your debts into your mortgage payments. Mortgage interest rates are usually lower than credit cards and installment loans; be aware that you generally incur other costs with this option, like paying an interest penalty to break your current mortgage contract, appraisal and other fees. Do the math to see if this option makes sense from a cost perspective.

You could get a debt consolidation installment loan from your bank or financial institution, which lets you benefit from a single payment that will help you pay debt down faster.

Another consolidation option is a debt management program. In many cases you can include credit-based debt and other unsecured debt as well, such as medical bills, giving you a chance to centralize all of your financial commitments. Remember, your credit score will not be used as a qualification for this strategy.