Debt Relief Experts
Dealing with credit card debt can be overwhelming, especially when you have multiple credit cards with high interest rates. That’s where credit card debt consolidation can help. In simple terms, it’s like organizing a messy closet—you combine all your credit card debts into one loan at a lower interest rate. This makes it easier to keep track of your payments and get out of debt faster.
Today, we will outline the options and steps to consolidate your credit cards in Canada. We will look at the pros and cons of different credit card debt consolidation options and help you become debt-free.
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How Does Credit Card Debt Consolidation Work?
Credit card debt consolidation combines multiple credit card balances into a single, more manageable payment. This can be achieved through various methods, such as balance transfers, personal loans, or home equity loans.
Consolidating credit card debt makes debt repayment easier, reduces interest rates, and allows you to become debt-free sooner. With balance transfers, for example, you transfer high-interest credit card balances to a card with a lower or 0% introductory interest rate, saving money on interest charges. Personal loans and home equity loans offer fixed monthly payments and interest rates, allowing you to consolidate your debts into a single loan with regular monthly payments.
By consolidating credit card debt, you streamline your finances, reduce the total amount paid in interest, and work towards achieving financial stability. It’s crucial to carefully evaluate the terms and fees associated with each consolidation option to ensure it aligns with your financial goals and capabilities.
Combining debts into smaller monthly payments can improve your financial situation and help you pay outstanding debts sooner. However, if you can’t afford your consolidation payments, you can find yourself in a much more severe financial situation, potentially risking assets you may provide as security.
When you are thinking about consolidating your credit card debt, it is essential to understand how much debt you have. How much do you owe on each credit card? How much interest is each credit card company charging you? What are the minimum monthly payments? Knowing these details will help you select which consolidation option that works best for you.
Nine Ways to Consolidate Credit Card Debt
There are several ways to consolidate credit card debt. Any option you choose should simplify payments, lower interest rates, and make debt repayment easier.
Here are nine ways to consolidate credit card debt:
Balance transfer to a low-interest credit card
This involves moving your current credit card balances to a new credit card with a lower interest rate. Look for companies that offer promotional periods of low or 0% interest on their balance transfer credit card. Transferring balances to a low-interest credit card allows you to save on interest charges and pay off your debt sooner.
Credit card consolidation loans
Some financial institutions offer loans specifically designed to consolidate credit card debt. With a debt consolidation loan, you borrow a lump sum to pay off your cards and make fixed monthly payments towards the loan. Depending on your credit score and financial situation, lenders offering these loans may have different requirements and terms. For example, some may require you to cancel your old credit cards, which reduces the risk that you will get into more credit card debt while you are paying off the loan.
Unsecured personal loan
You can consolidate your credit card debt with an unsecured personal loan from a bank or credit union. These loans typically don’t require collateral and can provide flexible repayment terms. Beware of online lenders offering fast and easy installment loans for individuals with poor credit scores, as these loans carry very high interest rates.
Home equity line of credit<
If you’re a homeowner, you can use the equity in your home to consolidate your debt through a home equity line of credit (HELOC). A HELOC can offer lower interest rates compared to credit cards. A home equity line of credit allows you to borrow up to 65% of your home’s market value, so you must have sufficient equity in your home to qualify. A HELOC is a form of revolving credit, meaning you can continue to borrow as you pay off your balances up to a maximum credit limit.
Mortgage refinancing
Refinancing your mortgage involves replacing your existing mortgage with a new one. You can also apply for a second mortgage from a new lender to repay credit card debt.
If you have sufficient equity in your home, you can refinance for a higher amount than your current mortgage and use the extra money to pay off your credit card debt. Mortgage rates are typically lower than credit card interest rates and other unsecured loan options, so consolidating through your mortgage can save you money on interest. As with any secured loan, there is the risk of foreclosure if you miss your new, higher mortgage payments.
Car title loans
Another option for credit card debt consolidation is utilizing car title loanscar title loans, where you use the value of your vehicle as collateral to secure a loan. While this can provide access to quick cash, it’s important to proceed with caution. Car title loans typically come with high-interest rates, extra fees, and short repayment terms.
Debt settlement
You can negotiate with your credit card provider about accepting less than the total amount owed. This can work for small balances or if your credit card debt is old and with a debt collector. When negotiating with creditors on your own, consider asking for a reduced payment (debt settlement), extended repayment term, and lower interest rate.
Debt management plan (DMP)
A credit counselling agency may be able to put your credit card debt and other outstanding bills into a debt management program. Your credit counsellor negotiates repayment terms with your creditors, which can involve lower or no interest rates. However, if you have large credit card debt, a DMP may not offer debt relief since:
- You must repay 100% of your debts.
- It is not legally binding on creditors.
- A debt management plan cannot deal with all debts.
- Your credit score and credit report will be affected.
Consumer proposal
Consumer proposals are helpful for finding debt relief when you have significant unsecured debt, such as credit card debt, payday loans, or student loans. Through this legal process, a Licensed Insolvency Trustee negotiates a settlement amount with your unsecured creditors. Settlements can reduce your debts by up to 80%. You repay the settlement amount over a period of up to five years, interest free. Consumer proposals are a good debt solution for those facing different types of debt and looking to avoid bankruptcy.
If you are burdened with high credit card debt, comparing a consumer proposal with a debt consolidation loan is a good idea.
The Pros and Cons of Credit Card Debt Consolidation
While credit card debt consolidation can offer numerous benefits for debt relief, it’s essential to weigh the pros and cons of any debt consolidation option:
Pros:
- Lower interest rates can save you money in the long run and provide a faster path to becoming debt free.
- You get a simplified repayment with one fixed monthly payment.
- Your monthly payment may decrease because future payments can be spread over a new loan term. However, if you are only making minimum payments on your credit card balances today, your monthly payments may increase, in which case a solution like a consumer proposal may be a better option.
- Your credit score can improve if it means you are less likely to miss payments, and your credit utilization rate falls as you pay down debt.
Cons:
- You may end up paying more in interest if you extend your loan term too long or, worse if you continue to use your credit cards and build up new balances.
- Additional fees, such as balance transfer, mortgage processing, and appraisal fees, may apply.
- You risk assets to seizure or foreclosure if you miss loan payments on any secured loans you take out to consolidate unsecured credit card debt.
- Debt consolidation can harm your credit score if you miss payments. Solutions like a debt management plan or consumer proposal will appear on your credit report. However, the negative impact is temporary and generally outweighed by the benefit of eliminating your credit card debt.
- Bad credit consolidation loans come with the risk of high interest.
- You risk falling victim to a loan scam if you choose a bad lender.
- You may be denied a consolidation loan due to a poor credit score.
Get Help with Consolidating Credit Card Debt
When faced with significant credit card debt, consulting a licensed insolvency trustee (LIT) can be a wise step. An LIT can provide expert advice on various debt management options, including debt consolidation. Our team at Hoyes Michalos will review your financial situation and explain the pros and cons of consolidation, such as potentially lower interest rates and simplified payments versus possible impacts on your credit score. We will discuss alternatives like consumer proposals or bankruptcy if appropriate. By exploring these options with an LIT, you’ll gain a clearer understanding of your financial position and the most suitable path forward for your specific circumstances. This professional guidance can help you make an informed decision about managing your debt effectively.
According to our 2023 Joe Debtor study, our typical client owed an average of $54,100 in unsecured debt, including $16,200 in credit card debt. If you have credit card debt over $10,000, consider talking with a licensed insolvency trustee about a consumer proposal.
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FAQs
Let’s look at some of the most commonly asked questions regarding credit card debt consolidation and finding debt relief.
Can I still use my credit cards after debt consolidation?
After debt consolidation, whether you can still use your credit cards depends on the terms of your consolidation plan and your lender’s policies. Some methods, like balance transfers or debt management plans, may require closing old credit card accounts, while others may not.
You can apply for new credit cards after consolidation, but approval depends on factors like your credit score and recent consolidation activities.
Can I consolidate my credit card debt if I have bad credit?
Consolidating credit card debt with bad credit can be challenging, but it’s not impossible. Lenders may only accept a consolidation loan if you have a good credit history. Getting a cosigner for a consolidation loan can be one solution, but it comes with risks to the cosigner. Options such as debt management plans or a consumer proposal are still available even if you have bad credit.
Can I combine all credit card debt?
Combining all credit card debt into a single consolidation plan is possible, provided the consolidation loan covers your total debt. However, if your consolidation option falls short of covering all your debts, you may need to explore alternative solutions, such as a consumer proposal and asking for debt forgiveness.
Does credit card consolidation hurt your credit score?
Credit card consolidation doesn’t hurt your credit score; it can sometimes have a positive impact. Consolidating multiple credit card balances into a single loan may lower your credit utilization ratio, positively affecting your credit score. However, certain factors, such as opening a new account or closing old ones, may temporarily impact your credit score. Missed payments or defaulting on the consolidation loan can also negatively affect your credit score.
Should I take money from my RRSP to pay off credit card debt?
Taking money from your Registered Retirement Savings Plan (RRSP) to pay off credit card debt is generally not recommended. Withdrawing funds from your RRSP to pay down debt can have significant financial implications, including tax consequences and loss of potential growth in your retirement savings. Early withdrawals from an RRSP may incur withholding taxes and permanently reduce your retirement savings.
Tips for Successfully Consolidating Credit Cards
The primary goal of credit card debt consolidation is to simplify debt repayment and reduce the overall interest rate, making it easier to get out of debt.
Here are a few tips we recommend to ensure your debt consolidation process goes smoothly:
Read all your loan terms
Make sure to read all the terms of your loan, including the loan amount, interest rate, prepayment options, penalties, and fees. Understand the total amount you will pay over time in interest and compare this to other options.
Choose the right lender
Selecting the right lender is crucial when consolidating credit card debt. Avoid online rapid loans and alternative lenders that often charge interest rates of 30% or more. You do not want to consolidate with a loan with a higher rate than your credit card debt.
Review your budget
Review your budget to ensure you can afford your loan payments and avoid missed payments by keeping track of your due dates.
Use our debt consolidation calculator
Our debt calculator compares your monthly debt repayment under different debt relief options, including a debt consolidation loan, debt management plan and consumer proposal.
Create a repayment plan
Once you’ve consolidated your credit card debt, you’ll have a single monthly payment to make. Creating a realistic repayment plan that fits your budget and allows you to pay off the debt within a reasonable timeframe is essential. Make timely payments to avoid late fees and further damage to your credit score.
Avoid new debt
Consolidating credit card debt won’t solve overspending and financial mismanagement. It’s crucial to address the habits and behaviours that led to credit card debt in the first place. Avoid using credit cards for unnecessary purchases and focus on living within your means.
Monitoring your progress is essential as you work toward paying off your consolidated debt. Track your loan balance, interest rates, and repayment schedule to ensure you stay on a path toward financial freedom. By staying proactive and making sure you make your minimum payments on time, you can eliminate your credit card debt and achieve your financial goals.
