Credit Canada

Will Credit Consolidation Work For You?

He's got about $20,000 total outstanding on two credit cards, his wife's line of credit is jacked up another $10,000 and he's paying double-digit interest rates. 

With that much debt, it would seem like a no-brainer that one of my good friends, who shall remain nameless, should consolidate his debt. After all, he has close to $200,000 in equity in his home, plenty of cash to pay down all those credit cards and lines of credit that are costing him more than $400 in interest each month to carry. 

"No, I'm not touching those at all. I'm gonna pay them down on my own," he told the bank manager who tried to advise him to pay off the credit cards and tack the debt onto his mortgage. "If I pay off those cards, I'm just going to rack them up again right to the limit."

His addiction to eBay and the fact that one of his cards is registered with an online betting service have not helped him fight his growing credit problem, but the bottom line is he know his limits -- certainly his credit limit. 

The logic may seem flawed, but my friend is not alone in recognizing the inherent problems that come with consolidating debt and paying down credit cards. Credit counsellors say a significant portion of consumers will simply max their credit cards back out again once they get the balance down to zero. 

It prompts the question: Is credit consolidation a good thing? 

Laurie Campbell, executive director of Credit Canada, a not-for-profit charitable organization, says the statistics show many Canadians who consolidate their debt end up getting back into financial trouble. 

"It's true, but here's a novel idea: Consolidate your debt and then cut up the damn credit cards," says Ms. Campbell. "You have to cut them up. If you are addicted to credit, it's like an alcoholic having a fully stocked bar and then saying I'm going to stop drinking." 

A survey her group did this past summer found four out of 10 Canadians did not pay off their credit cards each month. It also found only 5% of Canadians  tried to obtain advice about credit-and debt-related issues from a free counselling service. 

'Consolidate your debt and then cut up the damn credit cards' 

Some make the comparison that being addicted to credit cards is like being addicted to food. You cannot cut out food, which makes losing weight so difficult. Cutting out a credit card is just as impossible; there are many things you have to have a credit car for, such as renting a car, booking a hotel, online purchases, even applying for university online. 

"I'm an advocate of proper use of credit," says Ms. Campbell. "Do you really need more than one card? You need one all-purpose card, at a reasonable credit limit. Sometimes you have to call your creditor and say 'lower my limit.' You can't get in as much trouble with one card as you can with 10."

When it comes to consolidation, the lesson is that you have to make changes in your lifestyle. And holiday season spending brings all the issues into sharper focus.

"People get so caught up in the emotion of the season they don't think about the consequences of blowing your brains out over the holidays. Our busiest time of the year is January and February," says Ms. Campbell, referring to people who seek help when the bills start rolling in.

Joan Dal Bianco, vice-president of TD Canada Trust, says home equity line of credits have become increasingly popular because of maxed-out credit cards. Consumers have used their rising house price as a way to pay off all their credit cards.

"When people are making the decision to consolidate they are not also making the decision to make lifestyle changes," says Ms. Dal Bianco. "We counsel people on debt consolidation."

TD's financial advisors will discuss your debt problems when they look at your overall financial plan, says Ms. Dal Bianco, who used to work in the bank's retail division. "Advisors will give you tips on how to not use credit or reducing your limit." 

But the bottom line is when someone is making the decision to consolidate all the debt they have, they really have to consider what other changes they are going to make in their life. "They have to make decisions about why they got into so much trouble to begin with," says Ms. Dal Bianco. 

*Material reprinted with the express permission of: "Financial Post", a CanWest Partnership.