Consolidating Credit Card Debt
Credit cards are an excellent tool that, in theory, allows you to purchase something while delaying payment.
For significant expenses that you couldn’t afford to make in one lump sum, it can be a good idea to spread out payment, plus interest, over a few months.
Unfortunately, when credit card utilization gets out of control, it’s hard to rewind to zero balance.
For a lot of our clients, doing without credit cards was not an option.
More often than not, people who accumulate credit card debts need credit cards to cover essential living costs, rather than rely on them for convenience.
As a result, they can’t afford to make more than minimum payment to the multiple balances every month.
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They face an impossible dilemma.
Making the minimum payment to every balance is as much as they can do to avoid additional fees.
But the minimum amount doesn’t seem to reduce their credit card debt.
For many, the realization they are in trouble doesn’t come until things are getting too much to handle.
It could be an unexpected invoice that prevents them from making the minimum payment.
It could be the fact that your monthly budget doesn’t allow you to make minimum payments to all your credit card balances.
The first and most important question at this point is: Can you streamline your credit card payments and reduce costs to pay off the debts?
If the situation sounds too familiar, you’ve probably been looking at different financial options to get your credit card debts under control.
Using a credit card debt consolidation loan tends to appear on top of all Google searches.
Here, we explain what credit card debt consolidation means and whether it is suitable for your situation.
We will also review some alternatives to help you reduce credit card debt, even if you can’t consolidate payments.
Who needs credit card debt consolidation?
Credit card debt consolidation is not for everyone.
The idea behind a consolidation solution is that it combines multiple payments into one monthly, manageable, and affordable payment.
A credit card debt consolidation loan is unlikely to help you reduce costs significantly if you have credit card debt on only one credit card account.
Ideally, someone who can benefit from a consolidation loan needs to pay off multiple credit card balances at once.
This could happen for a variety of reasons:
- You have accumulated too much cost in balance repayments;
- You want to reduce credit card debts rapidly across all your credit card accounts;
- Maxed out credit cards and need to reduce the balance;
- The collective minimum payment of multiple credit card debts exceeds your budget;
- You want to reduce credit utilization and improve your credit rating.
The credit card debt consolidation loan combines multiple credit card balances into one monthly payment, which has a lower interest rate than what you would get if you maintained separate payments.
This can provide you with some financial leverage, which can be enough to reduce credit card debts and pay off the balance on multiple credit card accounts.
What are the advantages of credit card debt consolidation?
Credit card debt consolidation loans are a suitable solution for anybody who wants to manage multiple credit card balances at once.
Individuals who find it challenging to manage multiple payments and regain financial control report the following benefits from a consolidation loan:
- The single monthly payment keeps you on track of balance repayments;
- The accrued debt becomes more manageable and affordable;
- Credit card debt consolidation also reduces the total amount of money you owe;
- The consolidation loan dramatically reduces the lifetime cost of the debt;
- You can become debt-free much faster.
How do you start with credit card debt consolidation?
Before applying for a credit card debt consolidation loan, it is helpful to gain a full overview of your situation.
The process will help you understand not only whether you qualify for a loan with financial institutions and consolidation companies, but also highlights financial challenges you need to address to become free of debt.
First step: List all existing credit card debts
You can’t figure out how much you need to borrow to pay off your credit card debt if you don’t catalogue the totality of your credit card debts.
Ideally, you want to document your debts in a file that lets you list your credit cards, the maximum balance you can use, the account number, the interest rate associated with the specific account, and the amount you currently owe.
A spreadsheet document can be best suited to the exercise.
Second step: Create a budget
Did you know that smart budgeting can play a significant role in managing credit card debts?
You should use your budget to compare your monthly income with your monthly expenses.
It’s a good idea to highlight unavoidable costs such as insurance, rent, and living costs.
The process will help you identify unnecessary costs that could be preventing you from paying off your credit card balance.
Additionally, it also allows you to determine how much you can afford to pay towards your credit card balance every month.
Use the budget as a roadmap for your debt-free journey.
Reach out to financial advisors
Ideally, you want to schedule an appointment with different financial and debt management experts to review your options.
Most reputable debt advisors offer a first consultation free of charge to help assess your situation and understand the best options for you.
You can plan to meet with:
- A financial planner;
- An accredited credit counsellor;
- A licensed insolvency trustee.
This will give you many options and expose the pros and cons of different credit card debt consolidation plans.
Use a credit card debt consolidation loan
Banks or consolidation companies can offer credit card debt consolidation loans to pay off your outstanding debts.
However, to be able to apply, you need to qualify for the loan.
A consolidation loan is suitable for individuals with a high income, good credit rating, and assets that can be used as collaterals.
If you’ve been turned down for a consolidation loan already, it’s best to avoid trying multiple banks as many hard credit inquiries in a short time will damage your credit report.
Additionally, the loan is designed to tackle the current outstanding balance.
However, if you carry on using credit cards as you repay your consolidation loan, your debt situation is not going to improve.
A credit card balance transfer offers consolidation services
It is a limited time offer with a lower interest rate for a specific timeframe to help you pay off the debt.
However, you have to be careful about this option because:
- The transfer may come at a cost that can outweigh the amount you save through a reduced interest rate;
- The promotion rate only applies to the balance you transfer, so if you already have debts on the account, the rate will not apply to the existing balance;
- If you don’t pay off the debt before the timeframe comes to an end, the interest rate will rise again.
Consolidate your credit card debt with a debt management plan
A credit counsellor can negotiate with credit card companies to reduce the interest rate and sometimes also the amount of the debt.
Once creditors agree to the negotiated debt management plan, you can combine all your credit card debts into one affordable, monthly payment, similar to a credit card debt consolidation loan.
A debt management plan can last up to 5 years and avoid insolvency programs that would hurt your credit ratings.
However, not all creditors are willing to negotiate with a credit counsellor.
As the process isn’t legally binding, creditors can refuse to negotiate, and they can also engage in legal pursuits and collections.
Besides, a debt management program also appears on your credit report.
What if you can’t consolidate your credit card debt?
Your local licensed insolvency trustee can recommend debt management programs to settle your debts and stop all creditors’ actions and court judgements during their lifetime.
If you file a debt settlement plan with a trustee, you will have to surrender your credit cards.
A consumer proposal is a federally regulated debt settlement solution provided under the Bankruptcy and Insolvency Act.
The proposal offers an interest-free settlement with creditors where the debt is often paid partially over up to 5 years before it is forgiven.
It appears on your credit report and lowers your rating to R7.
Personal bankruptcy is another federally legislated debt solution under the Bankruptcy and Insolvency Act.
You can become debt-free in as little as 9 months for a first filing, and up to 36 months for any additional bankruptcy filing.
The trustee can liquidate your assets and surrounder some income if you can afford to make a partial repayment of your debts.
At the end of which, the debt is forgiven, and your credit rating is an R9.
Get rid of credit card debt with the help of a local licensed trustee.
Call (877) 879-4770 to schedule a confidential appointment.