Consumer debt can be a tough obstacle to overcome, especially in Red Deer, where wages are high but so is the cost of living for the average resident. If your own level of debt is becoming too difficult to manage, the best thing you can do is act quickly and deal with the situation before it damages your finances.
Then again, reducing your consumer debt is easier said than done. Sometimes the situation is so far gone that a drastic solution is necessary to resolve things. If that’s the case for you, debt consolidation may be exactly what you need.
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Sources of Consumer Debt
Hopefully, your own financial situation has not yet gotten to the point when solutions like debt consolidation are on the table. So, before we discuss the process, let’s talk about some of the places consumer debt can come from. By learning about these sources, it may be possible for you to reduce your debts by more conventional methods and avoid more serious ones altogether.
That said, the biggest problem with debt, in general, is that there are many different life necessities, bad habits, and unexpected events that can lead to it if you don’t have the right financial tools, such as a good job and an emergency fund.
Necessities That Cause Debt
- Groceries and household supplies
- Gas, insurance, and other vehicle costs
- Internet, cell phone, and utility bills
- Rent or mortgage payments
- General taxes
- Books, tuition, and other educational costs
Bad Habits That Cause Debt
- Overspending on unnecessary items/services
- Maxing out credit cards and only making minimum payments
- Leasing or buying a vehicle that’s unaffordable
- Paying for an apartment, condo, or house that’s unaffordable
- Subscribing to too many services and memberships
- Avoiding or forgetting to pay taxes/bills of any kind
Unexpected Events That Cause Debt
- Car accidents, breakdowns, and unforeseen repairs
- Floods, fires, and other home crises
- Reduced work hours/wage or total unemployment
- Injuries, illnesses, and other medical emergencies
- Funerals, divorces, and other family matters
- Lawsuits, fines, and other legal issues
Do you know what the true cost of borrowing is? Find out here.
How to Tell Good Debt from Bad Debt
One confusing thing about debt is that it is sometimes necessary and even beneficial to your financial health under the right circumstances. On the other hand, some of the debts that would otherwise benefit you can also totally ruin your finances and drain all your savings if you’re not being careful.
So that you can learn to distinguish between the two, let’s use one of the most common consumer debt sources, a credit card, to illustrate both good and bad debt.
While the idea of credit card debt doesn’t sound very appealing initially, credit cards themselves are often the first credit product that consumers apply for. Not only are they one of the most widely accepted forms of payment, but they are also relatively easy to get approved for and even easier to use. Some cards even come with bonus perks, such as roadside assistance, cash-back dollars, and travel insurance.
On top of that, using a credit card responsibly is one of the most efficient ways of building a credit history and improving your credit score when it’s low. With good credit comes the possibility of larger credit products and lower interest rates in the future.
Good debt vs.bad debt, everything you need to know. Click here.
All that said, any credit card, particularly one with a high-interest rate, can lead to serious unmanageable debt if you overuse it. It’s even possible to end up with multiple cards in your wallet, which can easily cause you to lose track of all your monthly bill payments. The real problems occur when you start paying your bills late, short, or you miss them entirely.
Although minimum payments will save you from any penalties, it’s not good to make them a habit, as you’ll be accumulating interest and further debt with every bill you come up short on. Not to mention the more revolving debt you owe, the more your credit score will decrease over time. All that debt will eventually show up on your credit report and make you a less creditworthy borrower, which can often lead to lenders approving you for less favorable products or rejecting your applications entirely.
Click here if you’re looking to consolidate some credit card debt.
Debt Consolidation Methods
In general terms, debt consolidation refers to the act of paying off multiple debts using one action, in this case with either a loan or a type of program. The overall goal would be to pay off as many of your highest interest debts as possible, hopefully leaving you with only one monthly payment plan to follow.
Debt Consolidation Loan
The first method involves applying for a debt consolidation loan. This would be a lump sum of money that you could acquire through a bank or other lending source, assuming you’re qualified for approval. Essentially, you would receive that sum through direct deposit, use it to wipe away your debts, then pay off what you’ve borrowed through monthly installments with interest.
However, like any credit product, your finances, current debt, and credit would be examined beforehand to determine how risky you are as a borrower. Most lenders want you to have decent credit, a reasonable income, and responsible cash flow before they’ll approve you, although every lender has different standards. In the end, this is only the right option if you’re prepared to handle the responsibility of another credit product. Further debt problems may occur if you can’t make payments as agreed.
How to deal with a rejected debt consolidation loan application, click here.
Debt Consolidation Program
If you can’t qualify for or don’t want to take on a loan, the other alternative would be to enter a debt consolidation program, which you can do with the help of a credit counsellor. While this would involve a similar process, you would instead need to attend several credit counselling sessions, wherein your counsellor would contact your debt sources for you to negotiate the terms of the program.
You would then make your monthly payments toward this third-party counsellor, who would send them to satisify any lenders or debt collectors that are pursuing you. One thing to watch out for here would be your counsellor’s service fee, which may be applied once the process has ended. However, some credit counselling agencies are non-profit.
Eligible and Ineligible Debts
Now, before you decide on debt consolidation, it’s important to know whether your specific debts will actually be eligible because there are certain kinds that will not qualify for either of the above methods. While every consolidation provider’s process is a bit different, eligible debts are usually restricted to those that are unsecured or don’t belong to credit-related, legal, or government entities.
Secured debt, on the other hand, must be excluded because it involves collateral. Since your house, car, or other asset is still under the temporary ownership of a lender, it will not qualify. The same principle applies if your debt was assigned in court or by the provincial/federal government. Don’t worry, we’ve provided some examples below so you can determine if your debt is eligible or if you have to seek another alternative.
- Credit cards
- Unsecured personal loans and lines of credit
- Bills from utility, internet, and cell phone companies
- Non-federal student loans
- Auto repossession debt
- Mortgage and home equity products
- Vehicle loans
- Secured loans and lines of credit
- Government-granted student loans
- Alimony payments, lawsuits, and other legal fines
For another article about debt management, click this link.
Looking for Debt Consolidation in Red Deer?
If you need to access one of the debt consolidation methods above or if you’re searching for another form of debt relief, don’t hesitate to make Loans Canada your guide. We can get you set up with the best lenders and credit counsellors in your area. Simply contact us today or apply below when you’ve made your decision!