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  • 5 Things You Need To Avoid If Consolidating Credit Card Debt

    5 Things You Need To Avoid If Consolidating Credit Card Debt

    Cathy Plowman

    Equifax Canada recently revealed that debt levels continue to rise, with Canadians now owing a staggering 1.8 trillion in debt. So, it’s no surprise that many Canadians are looking for debt relief. But between debt consolidation programs, consolidation loans, debt settlement options, home equity loans, and more, what’s the best way to consolidate credit card debt? Well, that all depends on your personal situation—what works for one person may not work for the other! But no matter which option you choose, here are five things you should keep in mind.

    Top 5 Things to Avoid When Consolidating Debt

    1. Hiring a debt settlement company

    You may see ads or commercials from companies offering to “settle your debt for pennies on the dollar.” Sounds great right? But you know the saying, if it sounds too good to be true it probably is. Debt settlement is not the same as debt consolidation, no matter what you might read or hear.

    If you repay your debt through a Debt Consolidation Program with a not-for-profit credit counselling agency, you would pay back 100% of what you borrowed. (The benefit of a Debt Consolidation Program is reduced or stopped interest charges, as well as a repayment schedule that works with your monthly expenses.) If you were to repay your debt through a Debt Consolidation Loan from your bank, you would pay back 100% of what you borrowed as well, but owe your bank the full amount, hopefully at a lower interest rate. But when it comes to for-profit debt settlement services, they may claim that you only have to pay back a portion of what you owe, but of course, it comes at a cost. 

    Debt settlement companies and their shady practices—including large upfront fees, high-pressure sales tactics, complicated contracts, and false claims—have been the focus of consumer alerts from the Financial Consumer Agency of Canada. Debt settlement companies should be approached with extreme caution and skepticism—and always do your homework before signing any contract.

    2. Spending too much on debt consolidation fees

    If you’re considering repaying your debt through a Debt Consolidation Program (DCP), make sure you are working with a reputable agency. Ideally, they should be a non-profit credit counselling agency, as well as a registered charity, as these types of agencies will want to help you get back on your feet, and not put you further into debt! Therefore, if their services come with a hefty price tag, you should take it as a warning sign. Other items to consider:

    • Initial counselling session should be free
    • All credit counselling sessions should be free as well
    • If you sign up for a DCP, the initial set-up fee should be no more than $50
    • Administration fees, deducted from your monthly payment to cover processing costs and account management, should be no more than 10%

    3. Converting unsecured debt into secured debt

    Some people might consider consolidating debt into their mortgage because the interest rate on mortgages are generally much less than they are for credit cards. But credit cards are unsecured debt, meaning there’s no collateral if you default on payments. On the other hand, a mortgage is secured debt, so your home is used as collateral. If you default on your mortgage, the lender can take your home to recoup their loss (which is also why the interest rate is so much lower). But by rolling your unsecured debt in with your mortgage, you’ve basically converted unsecured debt into secured debt, putting your home at risk of foreclosure.

    An alternative could be a home equity line of credit, but again, you're using your home as collateral to pay off unsecured debt, and for many people, they just keep on adding more debt, which doesn't help their situation at all.

    Think very carefully before putting your home on the line. It’s one thing to be in debt; it’s quite another to lose your home! 

    4. Racking up credit card charges

    If you choose to get a debt consolidation loan—which may not even be an option because it requires a good credit score—be sure to put your credit cards on ice for a while. Many people who are fortunate enough to get a debt consolidation loan to pay off their debts get a false sense that they're in the clear and don't have any debt. Then, armed with zero balances on all their credit card accounts, they'll start charging up a storm. So on top of paying back the big debt consolidation loan, they now have to start making payments on their credit cards again too. So, it’s important to remember that just because your balances are zero, it doesn't mean you have a clean slate—you still have that consolidation loan to pay back!

    5. Moving forward without a plan

    Once you’ve decided which method of debt relief is right for you, it’s important to develop a solid plan for your finances so you don’t fall back into the credit card trap. You’ll want to create a spending plan that balances out your income with your expenses, develop savings goals, and start an emergency fund, so if your car breaks down or you need to take your pet to the vet, your first inclination isn’t to charge it to your credit card. Our budget calculator, monthly budget tracker, and all-new debt calculator can help you get started on your plan!

    If debt consolidation sounds right for you, give us a call. We can tell you how it works step-by-step, and review other debt relief options too. It’s completely free and confidential, and there’s absolutely no obligation. We are a not-for-profit credit counselling agency, and our counsellors are certified experts who simply want to help. Call us now at 1.800.267.2272.

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    Topics: Debt Consolidation

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