Avoiding Common Debt Consolidation Mistakes
You may soon become stressed out and tired of calls from collection agencies and looking at the continuous stream of credit card statements that begin to pile up at home.
Therefore, you may consider consolidating your debt to help get you back on your feet.
When you avoid common mistakes, you can get your finances back on track and find debt-relief solutions that are a good fit for you.
Debt consolidation can be a big relief and weight off your shoulders for many reasons.
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You are focusing on paying off a lump sum instead of juggling multiple creditors, deadlines aren’t passing you by, and you don’t have to worry about steep interest rates compounding.
However, there’s more work to do, and it isn’t time to sit back and relax yet.
While debt consolidation is the first step in the right direction for achieving financial health, there are four common debt consolidation mistakes you need to be wary of, so you don’t end up worse off.
1. Not Fully Understanding How You Got There in the First Place
Once you consolidate your debt, you can deal with one monthly payment and continue to spend as you please.
It may be a short-term solution if you’re not careful.
It’s in your best interest to understand how you got into debt in the first place.
It would help if you were motivated to change your habits instead of assuming this solution will solve all your money problems.
Chances are you’re consolidating between $10,000 to $15,000 worth of debt, which should be an eye-opening experience for you.
It takes time to rack up this much debt and is important to be honest with yourself about why you weren’t able to keep up with your payments.
You need to recognize the severity of the situation and take a closer look at how you got there when you choose to consolidate your debt.
This is not only a wise time to make positive changes when it comes to your finances but also to reflect on your past behaviors and spending.
Review how you got here and what to do now to make sure you don’t find yourself in a similar situation down the road.
Create a detailed breakdown of your spending and track your habits so you can change them.
Ask yourself if you’re an impulse buyer and make a note of where you can cut back spending.
It can be a useful reality check and help you see where your money is going.
Start a budget you can follow and stick to so you can break negative patterns and practice self-discipline so you can ensure you don’t find yourself in the same situation in the future.
2. Not Looking into All Your Options
There’s no universal solution for consolidating your debt, and you should know that you have options.
For example, a couple of choices include:
- 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;
- Signing up for a secured or unsecured loan with the bank;
- Participating in a Debt Management Program;
- Using a Consumer Proposal.
A Debt Management Program is a completely private and confidential option for people who are struggling with debt.
On the other hand, a Consumer Proposal is a legal process and form of insolvency that should only be considered as a last resort.
An excellent first step when you’re considering debt consolidation is to meet with a credit counsellor.
You can discuss and see why your debt balances have increased, put together a realistic budget to follow, and explore options for getting out of debt within a reasonable timeframe.
Your goal is to avoid consolidating your debt, continuing to spend, and accumulating more debt on the side.
It’s in your best interest to do your research and consider each option’s pros and cons before committing to a solution.
One option may seem appealing at first, but if you don’t read the fine print, you may end up with high fees and interest rate promotions that will soon expire.
Crunch the numbers and consider the aftermath of your choices.
For example, some options may leave you with bad credit for years after you pay off your debt.
You might not want to include all your debts and lump them into the consolidation, such as those that can be easily paid off.
3. Not Limiting Your Use of Credit
Debt consolidation mistakes that are common also include not limiting your use of credit.
Once you move your debt to a single payment or place, you essentially are paving the way for you to turn to your cards again and spend more.
However, this is also your chance to make a change and not begin using your credit cards again.
You might want to go as far as removing them from your wallet or cutting up the ones you no longer need.
If you’re not careful, you risk falling back into bad habits and getting yourself into more long-term trouble and debt.
Another option is to close your credit accounts, but be aware that doing so will lower your credit score.
You may want to keep at least one card open for emergencies and safety reasons and lower the limit on the card.
Choose the one with the best and longest credit history.
Consider if having a lower credit score may be worth the trade-off for not feeling tempted to use your credit cards.
Your credit will slowly improve as you pay down your debt, and you can always re-open another card in the future once you’re in a better place.
4. Not Having A Plan to Pay Off the Debt Consolidation Plus Other Debt within A Specific Time Period
If you’re only making minimum payments on your consolidation loan, then it could take years to pay it off in full.
It may be a long journey until you’re considered debt-free, and it’ll only be more challenging if you’re continuing to add on more debt in the process.
It’s another reason you may want to meet with a credit counsellor.
Together, you can agree to a timeline of when the debt will be paid off, which is typically within three to five years.
A defined deadline can help you stay on track and see that there’s an end in sight.
The tricky part is that balance transfers or lines of credit are managed on your own.
Therefore, you need to review your budget and find a way to make contributions so you can reduce your debt in a manageable and practical way.
It’s common for people to make the mistake of not having a plan and timeline for paying off the debt.
Take the time to determine how much you’re able to allocate toward your debt repayment each month.
Include the payment in your budget, so you always have it available and consider automating the expense.
Figure out what date your debt will be paid off based on your monthly contributions so you know when you’ll be debt-free.
It may also be helpful to put any extra money that comes your way toward paying off your debt.
For example, use extra bonuses, tax refunds, or any cash gifts you receive as a way to get ahead and pay off your debt more quickly.
Automating payments and setting it and leaving it will be beneficial.
It’s also wise to stay accountable and set checkpoints to revisit how far you’ve come so you can stay motivated to keep going strong.
If you’re feeling comfortable with your progress and are making more money or are ahead of schedule, you might want to make accelerated payments to speed up the process.
Now that you know about common debt consolidation mistakes and how to avoid them, you can begin to develop a plan for tackling your situation.
Remember that there’s not a one-size-fits-all solution for everyone and that it will require you to do your homework so you can make sure that your final decision will help you pay down your debt.
While using debt consolidation tools and solutions are useful and a good starting point, it’s also your job to stay committed to making your payments and not racking up more debt in the process.
At Bankruptcy Canada, we help people get a fresh financial start.
We have been online since 1999 and have more than 430 trustee offices across Canada.
We’re available to answer any questions you have and help you navigate your finances so you can get out of financial trouble and create a brighter future for you and your family.
Canadians that are trapped in debt are welcome to browse our website to find information on bankruptcy and alternatives to bankruptcy, such as a consumer proposal or a debt consolidation service.
If you’re looking for a way to eliminate your debts, get in touch with your local trustee today to regain control of your finances at 877-849-4770.