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I have been carrying credit card debt for some time now. For the most part, I make the minimum payments on time every month and pay more if I can afford to. The problem is that interest eats up most of my payments and the balance keeps going up. Should I consider getting a debt consolidation loan to pay the cards off and start from scratch?
If you’re carrying credit card debt that you can no longer afford, you may consider applying for a debt consolidation loan to pay off your balances. This type of loan leaves you with just one payment (the loan) instead of several (to your various credit card companies). This may reduce the monthly payment amount and may also reduce the overall interest and other charges that you’ll have to pay. At this point, this may appear to be the best alternative.
However, before you decide a debt consolidation loan is right for you, keep these 7 tips in mind:
- Debt consolidation loans aren’t right for everyone. The new loan is a long-term commitment to pay off your credit card debts in full. Before you apply, you should be confident that you’ll be able to make the payments for as long as it takes to pay it off. A Licensed Insolvency Trustee (LIT) will be able to assess whether or not you are a good candidate and help you make this decision before you meet with a lender.
- Do the math. Add up how much the loan + interest + fees will cost you. You should always know how much your total commitment will cost and then compare it to other options. Your LIT will help with this as well.
- Debt consolidation loans will have a negative effect on your credit score. Debt consolidation loans are viewed as a trouble sign by most creditors which will likely reduce your credit report. It will take time to rebuild your score and regain your creditors’ trust. Even worse if you bounce around between lenders after being refused.
- Debt consolidation loans aren’t a cure-all. A new loan won’t do you any good if you don’t change your spending habits as well. To avoid finding yourself in financial difficulty down the road, you need to learn how to manage your finances and set spending limits. Your LIT can help you deal with your debt, set up a budget, offer tips to curb spending and help you rebuild your credit rating.
- Credit card consolidation loans can be a viable option for some, but not for everyone. Some banks are reluctant to provide consolidation loans to clear debt owed to other banks.
- You may not be eligible. If you’ve missed some payments in the past on credit cards, loans, a cell phone or utility account, your credit score has been negatively affected which may result in the bank declining your request for a consolidation loan or charging you a higher interest rate because you are a riskier borrower.
- If you qualify for a debt consolidation loan to pay off all of your credit card balances, it’s going to take hard work and a good dose of discipline to make sure you don’t run up the balances again. Your best bet? Keep one card and get rid of the others.
Consumer proposals are a viable alternative to debt consolidation loans and should be considered. Only LITs are able to file a consumer proposal on your behalf. The LIT will review your budget, consider all debts and options to make sure the proposed payments are affordable. Your credit score will have no bearing on whether or not you qualify for a consumer proposal. Your budget, standard of living and stability of income will be the keys to determining how much you can afford and which option suits you best.
Know your options. Once you realize you have excessive debt, you should consult a qualified and reputable LIT who can help you take the first steps on the road to better financial health.
If you are burdened with debt stress, asking for sound advice is a sign of strength and the smart thing to do. Asking sooner rather than later is always better. Try our debt reduction calculator and call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.