Strategies to Eradicate Credit Card Debt
In the recent times, Eliminate Credit Card Debt has emerged as a prominent issue amongst many Canadians. A significant 93% of individuals owe some form of credit card debt, with the average outstanding balance surpassing $25,000. Despite this, it is feasible to overcome credit card debt independently. The real question that surfaces is – are you capable of doing so?
Confronting Credit Card Debt Alone
It may come as a relief to many that they have the potential to navigate their way out of credit card debt independently. The secret lies in possessing a meticulously formulated debt reduction strategy, beginning with the establishment of a household budget. This process requires you to be stringent with your spending habits and invest the saved amount into debt repayment.
Aiding this process of debt repayment could be the practice of negotiating better terms with your credit card providers. If your payments are current and your credit score hasn’t plummeted too far, they may work with you to find a lower interest debt option. A reduced interest rate means that a larger part of your monthly payments are applied to the balance owing, thereby saving you money in the long run.
The Impact on Your Credit Score
Paying off your debts independently has the least impact on your credit score in the long run. The initial step would be to catch up on any payment arrears; constantly missing payments or paying less than your minimum payment will cause more damage to your credit. Once you catch up, continue to apply as much as you can each month to decrease your credit card debt.
Consolidation of Credit Card Debt
Consolidating credit card debt can aid in lowering your monthly payments, but you will still have to pay off your original balances in full. The amount of interest you will pay depends upon the strategy you choose:
- A debt consolidation loan can consolidate balances on several high-interest credit cards into one lower interest loan. You will need to qualify for a new loan and bear risks if you cannot meet the payment terms.
- A debt management plan consolidates several small debts into one payment plan through a non-profit credit counselor. It is not a debt settlement program as you still pay 100% of the original debt. However, relief in terms of interest is often possible.
If you have equity in your house or other assets you can use as collateral, you may be able to consolidate several credit card debts into one new home equity or debt consolidation loan.
Risks of Debt Consolidation
Borrowing against the equity in your home is an extremely risky way to consolidate credit card debt and other outstanding bills. Failure to make your payments can lead to your lender taking action to foreclose on your home or take back what you have pledged as security for the loan. Debt consolidation loans can also carry a very high interest rate.
A debt management plan works well if you only have credit card debt and your balances are not so overwhelming that you can’t pay them off. Payback will likely take between three and five years, depending on the amount of your debt.
A debt management plan requires that you repay 100% of your debts. A notice that you are participating in a debt repayment program will appear on your credit report and will remain there for two years after your payments are successfully completed.
Formal Solutions to Eliminate Credit Card Debt
Depending on the severity of your situation, you may need to opt for a more formal solution that will not only provide you with debt relief, but will also provide legal protection from actions taken by your creditors. A consumer proposal, unlike a DMP, is a legal form of debt settlement filed with a trustee in bankruptcy.
Because it is a debt relief program governed under the Bankruptcy & Insolvency Act you gain several added features:
- All wage garnishments, collection calls and other creditor actions are automatically stopped as part of the process.
- In addition to interest relief, a consumer proposal allows you to repay back less than the amount you owe. This makes a consumer proposal, in many cases, less costly than a debt management plan.
- It deals with all of your debts. No matter the size of your credit card debt or what type of unsecured debts you owe, if they are dischargeable in a bankruptcy, they are dischargeable by filing a consumer proposal.
Consumer Proposal: A Beneficial Form of Debt Relief
For many, a consumer proposal is the most financially beneficial form of debt relief. You can negotiate payments that you can afford and you will be debt free in three to five years. Because you settled your debts, a note will appear on your credit report that you are in a consumer proposal and will remain on your report for three years after you complete your payments.
Bankruptcy: The Last Resort
Bankruptcy is an option if your debts are so overwhelming that you can’t afford to pay them back and you can’t make an arrangement with your creditors through a consumer proposal. While it may seem like an extreme solution, doing nothing and continuing to struggle with credit card debts for years is not an option either.
Although a bankruptcy will appear on your credit report for six years after your bankruptcy is completed, you need to compare the choice to your alternative. Filing bankruptcy can eliminate your credit card debt, and assuming this is your first bankruptcy, you may be discharged within nine months. You can then immediately begin to rebuild your credit worthiness because you are no longer balancing old debt payments.
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If you need help choosing between these debt relief options, give us a call. We offer a free, confidential consultation where we will discuss your situation and help you choose a solution that will work for you. Get A Free Consultation
