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January 30, 2018 | By: Sandra Sherk

What Happens to My Credit Cards in a Debt Consolidation Program?

Credit Cards

Your financial stress is affecting everything—your sleep, your eating habits, even your personal relationships. You want to move forward, and you think you may have even found a solution with a Debt Consolidation Program (DCP). However, you have one major concern: giving up your credit cards. While it may seem a bit daunting or even frightening at first, it is possible to live a life free from credit card dependency once and for all. 

Credit cards and a DCP don’t mix

When you sign up for a Debt Consolidation Program, you need to give up your credit cards as well as any other sources of credit. The cards are destroyed—you do it yourself, which is actually very empowering for many people—and the credit card companies will cancel the cards from any further use. You might be thinking, “How will I live without credit?” The reality is that most people have already reached or exceeded their credit limit by the time they go on a DCP, so they’ve essentially been living without credit anyway. The only difference now is that they are working toward a solution.

Save on overlimit fees

When clients come see us for the first time, many don’t have any available credit left to use on their accounts. But every month, some credit card companies will charge them an overlimit fee of around $29—and that’s on top of their monthly interest charges! When you go on a DCP and it’s accepted by your creditors, they will no longer charge you the overlimit fee, which immediately helps improve your repayment ability.

Get out of debt quicker and save on interest costs

Interest rates charged by Canadian banks for popular credit cards are at an all-time high. On a Debt Consolidation Program, most credit card companies will waive or reduce the interest they charge on unpaid balances. Since most of your monthly payment goes toward paying off the principal balance of your account—not just the interest—you will get out of debt a lot quicker and save yourself hundreds (if not thousands) in additional interest costs. So, let’s say you have a balance of $973 at an interest rate of 24.99%. With a minimum payment of $37 per month, it will take you approximately 7 years and 7 months to clear your balance. However, on a DCP, the balance could be cleared in approximately 48 months versus 91 months, and you will be saving in interest charges.

No more collection calls

Once your creditors have agreed to accept the payments through a Debt Consolidation Program, the account will be removed from the debt collectors’ active queue and the debt collection calls will stop. However, you do have to stay up-to-date with your DCP payments, otherwise, the creditors will resume their calls.

Better credit score, faster

Carrying a balance at or near your credit limit will affect your credit score. Until you can bring that balance down, improving your credit score and rating will be that much harder. As the previous example showed us, that could take years! By paying the balance off through a DCP, you can start to rebuild your credit sooner.

The prepaid and secured credit card loophole

There might be cases where you absolutely need to use a credit card and cash simply won’t do, such as if you need to book a hotel, rent a car, or make online purchases. In these cases there are alternatives to using a traditional credit card. For example, you can use either a prepaid or secured credit card. This is a credit card that you load with your existing money, so there’s no risk of falling into debt because you’re not borrowing any money—you’re using your own.  

You can do it!

It might seem a bit scary not to have a credit card, but you can do it—many people just like you have. In fact, the Huffington Post recently reported that Canadians’ top financial priority in 2018 is paying down their debt.

If you need help, a certified credit counsellor is just a phone call away. They can help you establish a budget that includes your ongoing monthly expenses, as well as the occasional expenses, such as car repairs and clothing. (In many cases, what people might consider to be “emergencies” are actually occasional expenses they hadn’t budgeted for.) By establishing a savings plan or emergency fund for occasional extra expenses, you will have cash available when you need it without relying on credit and digging yourself deeper into credit card debt.

As a credit counsellor, I always find it satisfying when clients realize they can live without credit cards. The joy they feel when they are finally debt-free at the end of their Debt Consolidation Program is really rewarding.

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