The Do’s and Don’ts of Consolidating Credit Card Debt


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Credit cards can be a powerful tool to earn rewards, but they can also be dangerous. If you lack discipline with your credit card spending, you may find yourself with a bigger balance than you can pay off, perhaps across several credit cards. If you find yourself in this situation, know that you are not alone. Credit card debt is common in Canada. In fact, in 2015, Canadians carried an average of $21,458 in non-mortgage debt.

Once you find yourself in credit card debt, the high interest rates charged on most credit cards make paying off the balance a challenge. To pay off your credit card debt quicker, consider a credit card consolidation loan.

A consolidation loan pays off your credit cards all at once. You then have just one consolidated loan to a financial institution and a single monthly payment and a lower interest rate than your credit cards. This lower interest rate will save you money on interest charges and allow you to pay down the balance quicker. In addition, the consolidation loan will also have a fixed term and will require monthly payments that will eventually pay off the whole balance, instead of minimum monthly payments like a credit card. In some circumstances, you can also bundle your debt into your mortgage.

Do’s and Don’ts

Do shop around – Gather information on interest rates, terms, and loan agreements by contacting several financial institutions about debt consolidation loans. The interest rates offered by different lenders may vary, and you want to get the lowest possible rate.

Do make a complete list of your debts for your loan officer – Once you’ve chosen a financial institution, they will set up a meeting with one of their loan officers. When you meet with your lender, draw up a complete list of your debts, including debts that aren’t part of the consolidation loan. A full list will give your loan officer a comprehensive overview of your financial situation.

Do ask which debts are eligible – Consolidation loans are usually available for credit cards, but some also include utility bills and consumer loans. However, mortgages don’t qualify for debt consolidation loans.

Do take action sooner rather than later – If you think you’ll have trouble paying back your credit cards, you should act quickly instead of getting behind on your payments. If you miss payments or make late payments, your credit score will be negatively affected, which could impede your ability to qualify for a consolidation loan.

Do read your loan agreement carefully – Whether you choose to consolidate your credit card debt with a traditional bank or another financial institution, it’s essential that you read your entire loan agreement before signing. Don’t feel pressured to skim the front page and sign quickly. You need to be aware of the loan term, interest rate, and any special fees that may apply.

Don’t apply to more than three financial institutions – When you’re shopping around for the best consolidation loan rate, don’t allow more than three lenders to pull your credit score. Multiple credit inquiries can have a negative effect on your score.

Don’t assume your lender will pay off your loans – As part of their debt consolidation service, some lenders will pay off and close the accounts you want to consolidate while others will leave that responsibility to you. Make sure you hammer out with your loan officer exactly who’s responsible for paying off what, and whether or not they’ll close your accounts on your behalf.

Don’t miss any payments on your consolidation loan—Credit card companies are forgiving when you miss a payment. You might get dinged on your credit score, you might have to pay a higher interest rate, but that’s the limit of the penalties for a missed payment or two. Consolidation loans are different and aren’t revolving credit agreements like a credit card where you make a minimum payment. Most consolidation loans are either fixed term loans or the debt is bundled into your mortgage when you refinance. In both cases, you have a set payment every month. It’s imperative that you make these monthly payments as most financial institutions are not forgiving of missed payments.

The Bottom Line

If you find yourself in credit card debt, and you’re having trouble keeping up with your monthly payments, credit card debt consolidation could be an excellent option for you. As long as you don’t run up a balance on your existing credit cards once they’ve been paid off, you’ll be on your way to credit card debt freedom in no time.

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