How To Consolidate Credit Card Debt In Canada: A Complete Guide
Drowning in high-interest credit card debt? You have more options than just chipping away at minimum payments month after month. Credit card consolidation provides meaningful relief by centralizing multiple card balances into one payment.
This comprehensive guide will walk you through how debt consolidation works, how to assess if it’s right for your situation, and the best options available. We’ve listed the top alternatives if none of these options appeal to you.
With the right strategy, you can simplify out-of-control credit card payments and pay off debt years faster. But, it requires financial discipline to avoid falling back into bad habits. Here’s how to get started.
Key Points
- There are multiple ways to consolidate your credit card debt, including a debt consolidation loan, credit card balance transfer, a debt management program and other more severe programs such as a consumer proposal or bankruptcy.
- Consolidating your credit card can help you lower your interest costs and make your payments more manageable.
- Debt consolidation won’t fix the root cause of your debt, so it’s important to adjust your spending habits and stick to a realistic budget going forward.
What Is Credit Card Debt Consolidation?
Credit card debt consolidation is a financial strategy that involves combining the debt from multiple high-interest credit cards into one more manageable debt. The goal is to simplify your payments, lower your interest rate, and make it easier to pay off what you owe.
How Does It Work?
There are multiple options to choose from when it comes to credit card debt consolidation. But, in general, the big-picture process is as follows:
- Assess Your Debt: Begin by evaluating your existing credit card debts. Determine the total amount you owe and the interest rates associated with each card.
- Choose Your Consolidation Method: Research your options and determine which one makes the most sense for your situation. Typically, most consumers choose between a credit card balance transfer, a loan, or a debt repayment plan.
- Consolidate Debts: Once you have chosen a consolidation method, you use the new credit card, personal loan, or other financial instrument to pay off all your credit card debts. This leaves you with a single, larger debt but at a potentially lower interest rate.
- (Optional) Close Old Credit Cards: This will prevent the temptation to overspend on your credit cards again.
Best Credit Card Debt Consolidation Options
There are two main options for consolidating your credit card debt. They include:
| Credit Card Balance Transfers | Using credit cards with promotional or low rates to consolidate credit card debt |
| Debt Consolidation Loan | Refinance your debt with a lower interest rate loan. These options include a personal loan, line of credit, or home equity loans. |
Option One: Balance Transfer Credit Card
Balance transfer credit cards are a popular tool for consolidating credit card debt in Canada. They offer promotional rates on debt transferred from another credit card. For example, some balance transfer cards offer 0% interest rates for 6 to 12 months.
Although the promotion varies by card, they often have a 3% balance transfer fee. Likewise, failing to make a single payment can end your promotional rate. This causes the interest rate to revert to the standard rates, which can often reach 20.99%. This underscores the importance of punctual payments when taking advantage of promotional rates.
There are other nuances to remember when debating a balance transfer card. Since you are opening another credit card, you’ll need to meet credit score and income requirements. This is because applying for multiple cards and being denied can harm your credit. You’ll also want to pay off your credit card balance before the promotional period ends or refinance it into a debt consolidation loan. After the promotional rate, it will return to the standard credit card rate, usually around 20.99%.
| Pros of Balance Transfers | Cons of Balance Transfers |
| -Promotional low interest rate -Simplified payments -Lower monthly payments | -Temporary low interest rate -Balance transfer fee -Loan approval is not guaranteed |
Learn more: How To Do A Balance Transfer With A Credit Card
Who Is A Good Candidate For a Balance Transfer?
A good candidate for utilizing a balance transfer is an individual who is seeking a temporary solution to reduce interest costs and simplify debt management. Ideally, they should have a fair to good credit score and be capable of making timely payments to capitalize on the low-interest period. However, they must be cautious about balance transfer fees and high post-promotional interest rates and ensure they can pay off the balance before the promotional period ends.
Best Credit Card For Consolidation
| Card | Fees | Intro APR | Promotion Length |
| MBNA True Line® Mastercard® | Annual fee: $0 Balance Transfer Fee: 3% | 0% | 12 months |
| BMO® Preferred Rate MasterCard® | Annual fee: $29 (waived year 1) Balance Transfer Fee: 2% | 0.99% | 9 months |
| Tangerine Money-Back Credit Card | Annual fee: $0 Balance Transfer Fee: 3% | 1.95% | 6 months |
| Scotia Momentum® No Fee Visa | Annual fee: $0 Balance Transfer Fee: 2% | 0% | 6 months |
| CIBC Select Visa | Annual fee: $29 (waived year 1) Balance Transfer Fee: 1% | 0% | 10 months |
Learn more: Best Balance Transfer Credit Cards
Option Two: Debt Consolidation Loans
| Feature | Personal Loan | Line of Credit (LOC) | Home Equity Loan |
| Interest Rate | – Fixed rates – Usually lower than credit card rates | – Variable rates – Lower than credit card and personal loans | – Fixed rates – Lower than credit card and personal loans |
| Terms | Usually between 12 to 60 months | Open ended term | Usually 5 to 10 years |
| Repayment Terms | Fixed monthly payments, set term length | Flexible payments, based on amount borrowed | Fixed monthly payments, longer term |
| Eligibility | Requires good credit and stable income | Requires good credit | Requires home equity |
| Fees and Charges | Loan origination or admin fees | Possible fees for maintenance or annual fees | High closing costs and fees |
1. Unsecured Personal Loan
A personal loan is a financial product offered by banks, credit unions, or online lenders. It provides a lump sum of money, which you can use to pay off your credit card balances and then repay in installments. Unlike credit cards, personal loans have more structure, given their predetermined term length. When considering a personal loan, it’s important to compare offers, check your credit score, choose terms wisely, and thoroughly review the loan’s terms and conditions.
| Pros | Cons |
| – Lower interest rate than credit cards – Fixed monthly payments – Faster debt payoff | – Likely higher payments than credit card’s minimum payment – Stricter eligibility criteria – Good credit or a cosigner is typically needed for approval |
Learn more: Best Personal Loans
Who Is A Good Candidate For A Personal Loan?
A personal loan suits individuals with good credit, a stable income, and a clear repayment plan. It offers lower interest rates than credit cards and structured, fixed monthly payments for faster debt payoff. However, it requires stricter eligibility criteria to be met.
2. Line of Credit (LOC)
A Line of credit (LOC) lets you borrow a flexible amount from a lender, unlike a personal loan. It’s a flexible, revolving form of credit where you can borrow, repay, and borrow again. In contrast, a personal loan gives you a lump sum upfront with a fixed interest rate and fixed monthly payments. While a LOC usually has a lower interest rate than a credit card, it often has a variable interest rate and no set repayment schedule, making it less predictable than a personal loan.
| Pros | Cons |
| – Lower interest rate than credit cards – Flexible repayment options – Ongoing access to funds | – Variable interest rate – Temptation to overspend – Risk of increasing debt – Possible fees and charges |
Learn more: Best Line Of Credit Rates In Canada
Who Is A Good Candidate For A Line Of Credit?
A LOC is a good choice for those with a stable financial situation who want flexibility. It’s suitable for individuals with a good credit history and the discipline to avoid overspending. A line of credit lets you borrow up to a certain amount.
As such, you may be tempted by the remaining amount if funds are left over after consolidating credit card debt. A good candidate should be comfortable with variable interest rates, shop for the best terms, and monitor their finances to avoid unexpected pitfalls.
3. Home Equity Loans
A home equity loan typically offers the lowest interest rate, but the highest risk in the event of default. This is because the loan is secured by your home. This means that consistently failing to make payments can result in the foreclosure of your home.
However, you can generally borrow the highest amount with a home equity loan, making it a good option for those with significant credit card debt. However, there are various fees associated with home equity loans. This means they’re not an ideal option for paying off small balances. Although the lower interest rate may tempt you, the high fees can increase your cost of borrowing.
There are many types of home equity loans available. For example, a second mortgage provides predictable monthly payments, similar to a personal loan. In contrast, a HELOC operates similarly to a line of credit. The primary difference is that your home collateralizes these loans, which generally means you’ll receive a lower interest rate.
| Pros | Cons |
| – Lowest interest rate – Larger loan amount – Longer repayment term | – Higher monthly payments – Risk of losing your home – Reduced equity in your home – Highest fees and closing costs |
Who Is A Good Candidate For A Home Equity Loan?
To qualify for a home equity loan, you’ll need substantial home equity. While this varies by lender, you’ll generally need to own at least 20% of your home’s value. This is often defined as a maximum 80% loan to value (LTV), meaning that no more than 80% of your home is financed by mortgages.
Lenders will be extra cautious to ensure a good credit score and income stability. Overall, the candidate must be especially diligent in making payments to prevent home foreclosure. Likewise, candidates should compare loan types and negotiate terms for the best interest rate.
Questions To Ask Before Pursuing Credit Card Debt Consolidation
Before embarking on the path of credit card debt consolidation, it’s essential to reflect on these crucial questions to ensure it’s the right decision for you:
- What’s my total credit card debt and the average interest rate?
- How much can I allocate for monthly debt repayment?
- How long will it take to become debt-free with or without consolidation?
- Will I save money after considering consolidation fees?
- What’s my current credit score, and which lenders or creditors suit my profile?
- How will consolidation impact my long-term credit score?
- Can I stay disciplined to avoid overspending in the future?
- Have I considered credit counselling if needed?
- Am I willing to provide collateral to lower the interest rate?
Alternatives To Credit Card Debt Consolidation
While using a loan or a balance transfer to consolidate credit card debt is the most popular solution, they are not the only option available. If you have trouble qualifying for a loan, here are a few noteworthy debt relief options:
However, some might find it worrying to open more loans. Although you are saving money by transferring to a lower interest rate, some alternatives include:
- Consumer Proposal: A legally binding agreement to repay a portion of your debt, providing creditor protection.
- Debt Management Plan: Work with a credit counselling agency to negotiate a repayment plan with your creditor and consolidate all your debt into one easy-to-manage monthly payment.
- Bankruptcy: A legal procedure for liquidating eligible assets to settle debts. There are severe long-term consequences on your credit score.
Get Credit Card Debt Relief With A Consumer Proposal
A consumer proposal is a legally binding agreement between you and your creditors, carefully structured to provide a balanced approach to debt repayment. A Licensed Insolvency Trustee (LIT) oversees this arrangement. The amount proposed for repayment is tailored to your specific financial situation, considering your income and assets. The primary downside is that it will damage your credit score for up to 6 years.
| Pros | Cons |
| – Reduces the owed amount – Provides expedited debt relief – Your assets are not seized | – Damages credit score and history – Repayment requirement – Can limit access to new credit |
Who Is A Good Candidate For A Consumer Proposal?
A consumer proposal is a good choice for individuals who prefer to avoid bankruptcy. This method also allows you to maintain ownership of important assets such as your home, car, and other valuable possessions. To qualify, your debts must be under $250,000, excluding your mortgage. It’s often used by those who want creditor protection and are willing to repay a portion of their debt over an extended period.
Consolidate Your Credit Card Debt With A Debt Management Plan
A debt management plan is a service offered by credit counselling agencies. The agency will negotiate on your behalf to consolidate your debt and lower interest rates to make an affordable payment plan. If an agreement is reached, you’ll make structured payments to your counsellor, who will then pay your creditors. The downside is that the agency will charge additional fees. Additionally, it might limit your access to new credit, as you’ll be required to close your existing credit card accounts and avoid applying for new ones. Lastly, your credit report could be impacted for up to two years.
| Pros | Cons |
| – Negotiates lower interest rates – Consolidates debts into one – Avoid bankruptcy – Potentially lower fees | – Extended repayment terms may mean it will take longer to become debt free – Additional fees – Limits access to new credit – Will affect credit score and history |
Learn more: Debt Management Program (DMP)
Who Is A Good Candidate For A Debt Management Plan?
A suitable candidate for a debt management plan is an individual with multiple high-interest credit card debts who can commit to a structured repayment plan. This person should be dedicated to paying off their debt, willing to work with a credit counselling service and have the financial means to make affordable monthly payments.
Get Credit Card Debt Relief With A Bankruptcy
Bankruptcy is a legal process that offers individuals a fresh start by surrendering assets to a trustee who distributes them to creditors. However, it comes with several significant drawbacks. These include severely damaging one’s credit score and history, with the bankruptcy appearing on credit reports for up to 6 years. Additionally, there’s the potential to lose valuable assets, including a home, car, or savings. Bankruptcies can impact future financial opportunities, such as loan and mortgage approvals.
| Pros | Cons |
| – Eliminates most or all debts – Short process – Legally binding | – Severely damages credit score and history – Appears on credit reports for up to 6 years – Potential loss of assets, such as home or car – Impacts future financial opportunities |
Learn more: Bankruptcy In Canada
Who Is A Good Candidate For Bankruptcy?
Bankruptcy may be the best option for those who are facing overwhelming debt and have no assets to protect. They typically don’t have the means to make any meaningful payments toward their debts. It’s typically considered by individuals who have explored other options without success and need a fresh financial start, even if it means a severe impact on their credit and financial opportunities.
Bottom Line
Consolidating credit card debt can simplify payments, save on interest, and provide financial relief. Successful management involves creating a realistic budget, exceeding minimum payments, and monitoring credit. Remember to seek professional assistance when needed.
