Not Changing How You Use Credit
If debt consolidation isn’t done right, it can backfire. Let’s use credit card consolidation as an example. When you pile all your credit card debt onto a single card or another loan, you effectively free up thousands of dollars in your wallet. If you’re a spender, there’s a chance you could turn to your cards again, causing the problem to start anew.
However, if you want to turn over a new leaf, it would be wise to limit your access to credit and limit your temptation to spend. If you tend to use your line of credit instead of your chequing account, ask your lender to change your credit line to “deposit only” status. This allows you to make payments but not spend the available credit.
You can close and cut up any credit cards you don’t need if you think that’s the discipline you need, or you can put your credit cards on ice – literally freeze them in a big block of ice in your freezer. Then when you get the urge to use them, you’ll have time to think twice about your decision while the ice thaws.
The Fix: Think Long-term with Your Credit Score
Closing credit accounts will lower your credit score temporarily but maintaining a poor payment pattern will do worse damage. A little short-term pain can be worth a long-term gain. Your best bet is to keep a single card open, typically the one with the best and longest credit history. Hang onto this card for emergencies, but call the credit card company and lower its limit if you’re worried that you’ll start spending again.
How Credit Scores Are Calculated in Canada
While it’s true that closing many credit accounts at once may take a toll on your credit score, that’s better than keeping the door open to excessive spending. Bad credit doesn’t last forever if you don’t let it. Your credit will naturally improve as you pay down your debt, and you can always apply for another credit card or loan once your financial situation has improved.