When the expenses start piling on, managing your levels of consumer debt can be extremely difficult, particularly in a popular urban area like Lethbridge. And, once your debt becomes unmanageable, it only gets worse from there.
Luckily enough, there are many debt management solutions available to Canadians and one of them is known as debt consolidation. Keep reading if you’re curious about what this solution has to offer you.
Looking to get out of debt? Try these options instead of a loan.
What Gets People Into Debt?
One of the biggest problems with debt is that it can come from many different sources. There are the necessary expenses you accumulate on a regular basis, the unnecessary ones that you allow yourself, and then there are those that are totally unforeseen.
Common sources of consumer debt include (but aren’t limited to):
- Overdue bills for credit and non-credit products (utility bills, etc.)
- High-interest rates and late penalties
- Unaffordable mortgage/living costs
- Travel and educational expenses
- Cases of fraud and identity theft
- Consumer proposals, bankruptcies, and other delinquencies
- Car accidents, floods, and other unexpected events
Whatever kind of debt you have, the overall results will be far better if you act quickly and start weighing your options. As we mentioned, there are several kinds of debt management solutions available in Lethbridge. While it’s also essential to do some appropriate research before making your financial decision, a debt consolidation is one of the less drastic techniques you can try out.
Do you know what the true cost of borrowing is? Check this out to learn.
What Does Debt Consolidation Mean?
By consolidating your debts, you’re essentially paying them off or at least drastically reducing them using one swift action. Typically, this action can be performed using two similar (yet different) techniques.
Debt Consolidation Loan
The first technique you can try is to apply for a debt consolidation loan through your bank or an alternative lender. Once approved, you can use it to pay down your debts, ultimately leaving you with one monthly payment plan to follow.
Similar to many credit products, the more qualified you are to handle the responsibility, the larger, cheaper and more adjustable your loan will be overall. In order to qualify, it’s important to display financial fortitude. For the best results, it’s better to apply when you have positive factors on your side, such as a good credit score, decent income, and some security (collateral, cosigner, etc.) to offer the lender.
Avoid these debt consolidation traps.
Debt Consolidation Program
A debt consolidation program has the same goal of paying down multiple debts through a series of monthly payments. Rather than applying with a lender, however, you can enter this type of program with the help of a licensed credit counsellor. While you’ll have to attend regular sessions, this is often a better option if you can’t qualify for a favorable loan due to bad credit or if you would prefer help from a professional advisor.
Before you attempt a debt consolidation program, it’s important to choose your credit counsellor wisely. Although many counselling agencies are non-profit, others may charge a service fee.
In addition, there are some predatory agencies and scam artists out there who are banking on your need for a solution. These scammers will either out to charge you ridiculous rates or, even worse, steal your identity to commit fraud. Do not give your personal or financial information to a supposed credit counsellor until you’ve researched their organization properly and determined that they are lawful.
The 5 main reasons why people are rejected for debt consolidation loans, click here.
Can Debt Consolidation Impact a Credit Score?
Another essential thing to know about both forms of debt consolidation is that they can have both a positive and negative impact on your credit score. That impact can change your financial health significantly, so only attempt either technique once you’re fully aware of the potential consequences.
The Effect of a Debt Consolidation Loan
Although both solutions are bound to show up on your credit report, a debt consolidation loan, being a credit product, may have slightly more profound impact on your credit score and credit history. This is especially true when it comes to your payment activity, wherein every responsible monthly installment will increase your score, while any defaulted ones will decrease it.
As we mentioned, your ability to secure favorable credit products often hinges on your ability to make payments as agreed. Making your monthly debt consolidation loan payments late, in short amounts, or missing them completely can totally ruin your credit as a whole. On top of that, prospective lenders can see a record of the loan in your credit history for several years and may decline your applications for new credit until the situation is resolved.
Will debt consolidation look bad on my credit report? Find out here.
The Effect of a Debt Consolidation Program
Unfortunately, a debt consolidation program will also be listed on your credit report for several years, even after you’ve finished it. Similar to a loan, your payment activity will also have a large impact on both your credit score and history. For instance, if you make all your scheduled payments on time and in full, Equifax and TransUnion (Canada’s main credit bureaus) will mark the debt as paid and your score will gradually climb.
However, every payment you default on will once again be bad for your credit. Additionally, debt consolidation programs can result in an R7 credit rating for any of the accounts associated with the process. This is the third worst rating you can have and may also lead to a rejected application somewhere down the line. That said, your rating will rise again once you’ve successfully finished your program.
Want to know more about what affects your credit score? Click here.
Is Every Kind of Debt Bad?
Certainly not. In fact, there are many forms of debt that can greatly improve your financial situation. Of course, that positive effect will only be visible if you’re handling that debt in a responsible manner. If not, those same kinds of debt can be awfully detrimental to both your credit and finances. Don’t worry, distinguishing between these two debt types isn’t difficult.
Remember, some debt is actually good and often even becomes necessary as you go through life. For example, while some consumers can still get by without applying for one, a credit card can be a very valuable tool when you need it. From the easiness of paying for your daily costs to the perks that come with many specialty cards, the convenience of plastic can be hard to beat.
Plus, paying your bills on time and in full is one of the easiest ways to both build and improve your credit score. You’ll even have the option of making more than one payment a month or minimum payments when you can’t afford full balances.
On the other hand, that same convenience that you get from your credit card can be one of the fastest ways to accumulate consumer debt. If you tend to overspend and don’t bother to draw up the right budget, your monthly bills can quickly become unmanageable.
Although making minimum payments will temporarily spare you from any late penalties, you’ll have to pay interest on any balances that remain unpaid (learn more about minimum payments here). The more outstanding debt you carry around, the further your credit score will drop. And, the less creditworthy you are, the worse the results will be when you apply for any new product in the future. Suffice to say, even a relatively low maintenance product like a credit card can have huge consequences when not handled responsibly.
Finding Debt Consolidation in Lethbridge
Although there are many forms of debt management, a debt consolidation loan or program may be what’s best for your financial situation. If that’s the solution you’re looking for, you can sleep easy knowing that Loans Canada is on the case. Contact us today for more information about our products and programs.