If you find yourself in a situation where debt is overwhelming, there are a number of credit card debt solutions available.
Like most things, there are upsides and detractions for each choice and not every option is available to each person.
There are also different types of companies and services to help you with your dilemma.
A great deal depends on your particular circumstances and preferences.
Debt Consolidation Loan
This is where a lending institution, like a bank, credit union, etc., sets up a loan.
With that money you pay off all the other creditors.
It leaves you with a single, or “consolidated” loan.
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Whether the loan is approved and its interest rate depends upon such factors as current credit score, whether you have a business relationship with them, type of collateral, and net worth.
You may also be asked for someone to co-sign with you.
- Benefits – You only have one payment per month rather than multiple, frequently the interest rate is lower than most of the other creditors, and the loan is paid off over a fixed period of time. There are fees associated with this choice.
- Disadvantages – You will probably need something for collateral. That is something of equal or greater value to the loan that can be repossessed or sold if you fail to make payments. They will review your credit score and if it is not high enough, you can be rejected. Interest rates can be high, higher than a home equity loan.
Home Equity Loan
There are a number of terms for this including a refi or mortgage refinancing, or a second mortgage.
The amount available to lend depends on how far down you have already paid your mortgage.
So, if you have a mortgage for $250,000 and you have paid $50,000 of it, you have $50,000 in equity that will be available for a home equity loan.
You will need to speak with your banker or credit union about the details, including the interest rate.
- Benefits – Usually these loans are a lower interest rate and the payment terms are more flexible. It can be that you can just extend the term of your current mortgage. That is for the lender to decide.
- Disadvantages – You have to own your home and have enough equity to cover the amount you want to borrow. There will be fees involved and possibly a home inspection. Not all lenders like to issue this type of loan or they may have a maximum they will lend.
Line of Credit
A line of credit turns your bank-issued debit card into a credit card.
That means you can overspend using only that card up to a specified amount.
Just like a regular credit card, you have to repay that amount in monthly instalments.
Depending on the bank and its current standards, you may have to provide some collateral and the amount may vary.
- Benefits – This may be one of the lowest interest rates, depending on the bank’s policy and economic conditions. You have flexibility with repayment.
- Disadvantages – The interest rate can fluctuate with the Bank of Canada prime rate, so it can increase without much notice. You will need to maintain self-control about repayment and not increasing this debt.
Consolidate into Another Credit Card
Sometimes credit card companies offer some low interest rates to promote a new card.
Sometimes they will allow balance transfers from other cards into this new card.
If you can qualify, this is a good opportunity to consolidate debt.
However, remember that these promotional rates are usually only good for a limited time.
Then the rates can skyrocket.
- Benefits – With all the debt in a single source, it is easier to keep track. With lower rates you can pay more than the minimum each month and get into good standing quicker.
- Disadvantages – If you have so much credit card debt that you need to consolidate, it is not likely that your credit score will qualify you for a new card. As mentioned, the low interest rates are only available for a period of time, with the new rates significantly higher. Without a personal budget firmly in place, it may take a very long time to get rid of the debt.
Debt Management Program
This is a program offered through a non-profit credit counselling company.
The company negotiates with your creditors.
The company pays off all the credit cards and loans and then you repay the counselling company.
There are both non-profit and for-profit counselling organizations.
The for-profits can charge a large fee.
- Benefits – Most debt is repaid within three years but must be completed within five. There is either a low interest rate or sometimes none at all. The counsellor will provide free budgeting instruction, financial education, and one-on-one help.
- Disadvantages – The creditors must agree to the arrangement and not everyone qualifies. Your credit score is flagged for two years after the last payment is made.
You can offer to pay off your creditors in one lump sum but in less than the full amount.
Creditors are unlikely to agree to this one-on-one, but many credit counsellors have been successful.
- Benefits – The debt is eliminated immediately and you repay far less than the full amount. Your credit rating can be repaired in two years after the settlement, if you work through a non-profit counselling organization.
- Disadvantages – You have to have the lump sum available. For-profit companies have a lower success rate and still charge a hefty fee. Using a for-profit means your credit is impacted for up to seven years.
A Bankruptcy Trustee can negotiate a settlement with your creditors.
If the creditors agree, this will pay off the debts at a lower amount.
- Benefits – You repay less of the principal than you owe and interest stops. It avoids bankruptcy.
- Disadvantages – It is a legal process that will appear on your credit record. Once you start, you are committed to the program. At least half of your creditors must agree to the program or it will not go into effect. There is no ongoing educational support.
If you find yourself in significant debt, the best solution is to get counselling from a financial advisor.