Credit Card Debt Consolidation
Credit card debt can build up quickly and rapidly become overwhelming. With extremely high interest rates, aggressive marketing tactics and their overwhelming ubiquity in today’s culture, it’s all too easy to get into — and seemingly impossible to get out of.
The first sign of trouble for many people is that little note at the bottom of their credit card statement that says, “It will take you 34 years to pay off your credit card balance making only the minimum monthly payments.”
This can be especially disconcerting when you have multiple credit card debts and the collective minimum monthly payment on either maxes out or exceeds your budget. The good news is you have options to streamline your credit card payments, lower the costs and pay them off sooner than you might think.
What is Credit Card Debt Consolidation?
Credit card debt consolidation is the process of combining multiple credit card payments into a single monthly payment — ideally with a lower interest rate and total cost than if you continued to pay each bill individually. The two most common options for credit card debt consolidation are either a debt consolidation loan or a debt management plan.
How to Consolidate Credit Card Debt
The process of credit card debt consolidation will ultimately involve working with either a financial institution (to secure a loan) or credit counselor (to enter a debt management plan). However, before you decide on the best way to consolidate credit card debt, there are two important steps you will need to complete first — both to determine whether you qualify and understand which path is best for you.
Step 1: Catalog all your existing credit card debts — Make a list or spreadsheet documenting every credit card you currently have a balance on, its account number, interest rate and the amount owing. Another alternative is to use a debt repayment calculator.
Step 2: Write a budget — Write down your monthly income and subtract from that your fixed and recurring expenses and desired savings rate. This will help you determine what you can afford to pay every month.
Step 3: Schedule meetings — Speak with both a financial planner, licensed credit counselor and potentially even a Licensed Insolvency Trustee to get the full picture of your options. Find out the pros and cons and how each consolidation option matches your goal and desired outcomes.
Debt Consolidation Loan
One way to resolve or simplify your credit card debt consolidation with better payment terms is by opting for a debt consolidation loan. It’s a personal loan provided by either a bank or private lender in the amount of your outstanding debt. It allows you to immediately pay off your credit cards and make a single monthly payment on the loan instead.
Ideally, the interest rate on a consolidation loan will be significantly lower that what you’re paying on your credit cards — thereby lowering both your total monthly payment and the total amount you’ll repay over the lifetime of the loan
There are two things you want to be careful of when applying for a debt consolidation loan:
- It may not be a good idea to shop around for the best interest rate — Multiple ‘hard’ inquiries can damage your credit score. If you have a good relationship with your current banking institution, they may be most willing to give you competitive terms from the outset.
- Have a strategy to prevent further credit card use — Continuing to use your credit cards once you’ve paid them off will worsen your debt situation. Either freeze the accounts or hide the cards until you’ve paid off the consolidation loan.
Debt Management Plan
A debt management plan is a service provided by credit counselors for credit card debt consolidation or for consolidation of other types of unsecured debt. It involves negotiating with your creditors to reduce the total amount you owe and reduce or eliminate the interest on your credit card debts. Once an agreement is in place, the new balance will combine into a single, affordable monthly payment that you make to the credit counselor over a period of up to five years.
Aside from reducing the total amount of your debts and speeding up your timeline to become debt free, there are several other benefits to a debt management plan. These include:
- Having the advocacy and support of a credit counselor to negotiate on your behalf and disburse payment to your creditors
- Having a consistent and predictable monthly payment you can budget around each month
- Avoiding filing a bankruptcy or Consumer Proposal
The process does have some drawbacks, however, including:
- The process is not legally binding. Your creditors do not have to participate and may withdraw their participation at any time
- The process does not prevent or halt collections / legal action
- There are some negative impacts on your credit rating
Credit Card Balance Transfer
A credit card balance transfer is an option offered by banks and credit card issuers for credit card debt consolidation — bunching of multiple credit card debts onto one card — often for a low or significantly reduced rate over a specified timeframe. Common examples include a zero percent interest rate for six months or a one percent interest rate for one year.
This option can be an effective method of consolidating and reducing the total amount of your outstanding debt — and helping you pay it off faster. However, there are several factors you need to consider before moving forward.
- How much debt do you have on that card? The promotional interest rate applies only to the balance you transfer over. If most of your debt is on that card, you will still pay the higher interest rate on the original principal value.
- Can you pay off the debt before the end of the promotional term? If the interest rate rises from 0 percent to 19.99 percent and you still have debt remaining, can you manage the payments and interest costs?
- What is the service fee? Does the two to four percent lenders often charge to complete the transfer outweigh the amount you’ll save in interest payments over the term?
Benefits of Consolidating Credit Card Debt
Credit cards traditionally have extremely high interest rates and can be difficult to manage making only the minimum payments each month. If you have numerous credit cards and are struggling to keep up with them all, credit card debt consolidation may be an effective way to:
- Reduce the total amount of debt you owe
- Reduce the lifetime cost of your debt
- Make your monthly payments more affordable
- Shorten your timeline to becoming debt free
- Keep track and stay on top of your monthly debt payments
Other Options
Despite these potential benefits, it is possible debt consolidation may not be possible or the right credit card debt solution for your unique situation. But don’t despair — there are still options to address and eliminate your problem debt.
Consumer Proposal — A federally legislated debt solution provided under the Bankruptcy and Insolvency Act (BIA). It involves working with a Licensed Insolvency Trustee to negotiate an interest free settlement with your creditors with a lump sum or monthly payment you can afford to pay over a period of up to five years. A Consumer Proposal halts current collections action and court judgements and prevents future ones from taking place over the lifetime of your proposal, provided you continue to meet your payments and legal responsibilities.
There are many benefits of using the consumer proposal option for resolving your debt issue, one of which is that you can keep all your assets. A consumer proposal is also a much simpler and more straightforward option. In addition, it can result in lower monthly payments than that of a bankruptcy. In fact, this option puts you in the driver’s seat as you get to decide what would be an affordable amount for you to pay. To that end, you can choose to extend the repayment amount over a longer duration resulting in lower monthly payments.
Bankruptcy — A federally legislated debt solution provided under the BIA, which could help you become debt free within 9 to 21 months of your initial filing (or 24 to 36 months for second or additional bankruptcies). It involves working with a Licensed Insolvency Trustee to liquidate a portion of your assets and potentially surrender some income for the benefit and partial repayment of your creditors. A Bankruptcy halts current collection and court judgements and prevents future ones from taking place over the lifetime of your Bankruptcy, provided you meet all your statutory requirements.
Bankruptcy offers a debt resolution option to a person who owes more than $1,000 in debt, provided they’re insolvent and a resident of Canada. However since the payment terms in bankruptcy vary from person to person, it may not be the best option for everyone. For instance, if you have assets with a high value or a higher income, you may not be able to retain ownership of all your assets and you may be required to pay higher repayment amounts called surplus income payments. Furthermore, individuals filing for a bankruptcy for the first time may be able to complete it in as little as 9 months whereas others may complete it in 21 months.
Since it varies situation-wise, it’d be best to consult an experienced professional to discuss the best path forward. A Licensed Insolvency Trustee offers a Free Confidential Consultation to review your finances, learn your challenges and goals, and explain your options to become debt free. They must provide an impartial and unbiased perspective and will help you make the best decision for your unique situation.
Fill out and submit a short contact form and one of our qualified and experienced trustees will contact you within 24 hours.
More Information on Debt Consolidation
Visit these helpful resources to learn more about debt consolidation and compare your options:
- https://mnpdebt.ca/en/resources/debt-consolidation-faq
- https://www.debt.ca/debt-consolidation
- https://loanscanada.ca/debt/how-to-consolidate-your-credit-card-debt/
- https://www.creditkarma.com/credit-cards/i/ways-to-consolidate-credit-card-debt/
- https://www.nomoredebts.org/debt-help/debt-consolidation.html