Not Looking Into All Your Options
There is no single, one-size-fits-all way to consolidate your debts. There are plenty of options for you to choose from. Options can range from moving all of your credit card debts onto a single card in a balance transfer, opening a line of credit to house all of the debt you’ve incurred, or even signing up for a secured or unsecured loan with the bank.
With so many people struggling with debt, other options have also opened up that can function as a form of debt consolidation too. These options can include a Debt Management Program, a debt relief option which consolidates all your unsecured debt into on affordable monthly payment, or a Consumer Proposal which consolidates and reduces your debt. While a Debt Management Program is completely private and confidential option for people who are struggling with their debt, a Consumer Proposal is a legal process and form of insolvency that should only be considered as a last resort.
When someone is looking for a debt consolidation loan, we often find it’s very helpful for them to first meet with a non-profit credit counsellor to ensure they figure out why their debt balances have grown. A credit counsellor will also help them put together a realistic budget to make sure their spending stays within their income, help them explore all their options to get out of debt, and provide them with a plan to get out of debt within a reasonable time frame. Unfortunately, with consolidation loans, many times people don’t get out of debt quickly. It’s pretty normal for people to continue to spend more than they earn and re-accumulate debt at the same time they are trying to pay down their consolidation loan. Working out a realistic budget and putting in place a plan to get out of debt with a credit counsellor helps people to avo id this common problem.
When consolidating debts, some people are too eager to set the wheels in motion with the first option that appeals to them, but it’s worth looking at all of the routes you can take and weighing their benefits and drawbacks.
Balance transfers, for example, could come with incredibly low interest rates at the start, which may be enticing. The fine print could reveal that upfront fees are pricy and the interest rate may be promotional for the first six months only. Credit card companies offer these low introductory rates because most people end up paying a lot more in the long run.
It’s important to do your homework and crunch all of the numbers before settling on the best choice for you and your finances. Carefully consider the effects of your decision as well, since some options can leave you with bad credit for many years after you’ve paid back your debts. This is another reason why it can be a good idea to ask a professional credit counsellor about the benefits and drawbacks of the options you are considering.
As part of doing your homework, you can start by listing all of your outstanding debts and their interest rates. A student loan, with a fixed interest rate that’s significantly lower than your credit cards’, doesn’t need to be rolled into your consolidation, for example. Other cards may have small limits and can be easily paid off instead of being lumped into the consolidation, too.
If you feel intimidated with the process, that’s okay. A credit counsellor can advise you through the process.