Although consumer debt is something that every borrower will experience at some point, it can be particularly hard to get rid of once it starts bordering on unmanageable. This is definitely true in London or any other major city in Ontario, where wages are some of the highest in Canada, but so is the average cost of living.
Since debt can do a lot of harm to your credit and finances, it’s essential to resolve the situation before it reaches its boiling point and bankruptcy becomes your last resort. If that’s where things seem to be headed for you, debt consolidation may be the perfect solution.
If you’re interested in more about how choosing debt consolidation in London Ontario can help you regain control of your finances, we have all the information you need.
Good Debt vs. Bad Debt: What’s the Difference?
Like we said, taking on consumer debt during your life is more or less necessary, especially if you’re a regular credit user. Whether it’s your credit card bills, your education, or just your everyday living expenses, it all adds up somewhere and can be tough to handle under the wrong circumstances.
However, some debt is actually good for your credit and finances, as long as you’re being careful and only taking on an affordable amount. Look at the following examples for a better idea of how some debts can be beneficial while others are harmful.
Good Debt
That’s right, a reasonable amount of debt can not only help you pay for the things you want and need, it can even improve your credit and elevate your financial profile as a whole. Take your credit cards, for instance.
A credit card is meant to be a simple, yet versatile tool that introduces you to credit usage. In fact, these days it’s rare to meet someone that doesn’t have at least one credit card. Just like your debit card, it helps you swiftly pay for various consumer goods and services. On the other hand, a credit card is accompanied by revolving line of credit that you can withdraw from and pay back on a monthly basis.
Credit cards are also handy because:
- Many cards come with perks, such as reward points, roadside assistance, and travel insurance.
- It’s possible to make minimum monthly payments when you cannot cover your full outstanding balances, thereby avoiding any late penalties or added interest.
- You’ll also have the ability to make more than one payment per billing cycle, which can add diversity to your credit report, as well as rapidly build your credit history and increase your credit score.
- Interest is only charged on the sums that you borrow, making any no-annual-fee card a good option if you only use it for emergencies and basic low cost items.
For a more detailed look at good debt vs. bad debt, check out this article.
Bad Debt
Despite all these advantages, credit cards can be extremely hazardous when you take them for granted, which is a particular problem when you’re just learning to use credit. Nonetheless, it’s easy for anyone to overuse their credit cards and not be able to properly manage the consumer debt that follows.
Credit cards can also be hazardous because:
- With all the perks they provide, it’s tempting to periodically activate, use, and cancel multiple cards. This can not only cause massive debt, the resulting hard inquiries and closed accounts can harm your credit score and credit report.
- Your credit score will decrease even further if you use up more than 30% of your available credit limit each month. Keeping your credit utilization ratio lower than 30% is a great way to help improve your credit score.
- Minimum payments, while safer than defaulted ones, are not a healthy habit, as you would be taking on more unpaid debt every month and will have to pay interest on all of it.
- While some are free, many rewards cards come with a hefty annual fee. Unless you use the card regularly enough, the limited perks you receive may not be worth the added debt and stress.
Other Ways to Collect Bad Debt
Before we get on to debt consolidation in London, let’s quickly address some of the other ways to fall into unmanageable consumer debt. Armed with this knowledge, you would hopefully be able to identify the exact source of your debt and avoid such problems in the future.
Unfortunately, consumer and household debt can be the result of many incidents, including ones that are unexpected, such as:
- Overspending on goods/services that are unnecessary
- Paying for a house, condominium, or apartment that exceeds your budget
- Financing a vehicle that’s beyond your price range or needs constant repairs
- Getting in a car accident, having your identity stolen, or other emergencies
- Suffering from a medical condition that requires expensive medication/treatment
- Becoming unemployed or having your work hours/income reduced
Remember, no matter how your debt came to be, the best thing you can do is act quickly. After all, the longer your debts go unpaid, the worse your credit will get and the more you’ll have to pay in interest and penalties over time.
Plus, the longer you try to outrun your debts, the more risk you’ll have of being pursued by collection agencies and, eventually, declaring bankruptcy.
Debt Consolidation: The Solution You May Need
Now that you have a better idea of where some of your debt is coming from, it’s time to think positive and learn about the potential solutions. One of the first tactics you can try is a debt consolidation, meaning the act of paying down multiple debts (hopefully the ones with the highest rates) in one motion.
When all goes well, debt consolidation can be highly advantageous because it would hopefully leave you with a single monthly repayment plan to keep up, as well as significantly reduce the amount of interest you’re paying each year.
Typically, this is accomplished by using either a debt consolidation loan or a debt consolidation program, which are similar in their main goal but slightly different in the way you go about applying for and subsequently dealing with them.
Debt Consolidation Loans
If you’re already a seasoned credit user, a debt consolidation loan may be your best choice. Like the majority of credit products, you can apply for this kind of loan through many lenders in London. Once approved, you would use it to cover your debts, then repay your current lender over time through equally divided installments.
A prime lender, like a bank, would be more likely to offer you a larger loan with a lower rate and a more adjustable repayment plan but will have tougher restrictions during the application process. Generally, they’ll want you to have decent credit, a steady income and some security (a cosigner or collateral) before they will approve you.
Things to know about debt consolidation loans:
- To most lenders, the fact that you’re already in debt is a warning sign that you may default on your upcoming payments. Because of this added risk, they will likely charge you a high interest rate for your loan, which may be unaffordable.
- Since it’s a credit product, a debt consolidation loan will show up on your credit report. While complete payments are good for your credit score, the loan will be recorded in your credit history and may deter potential lenders when you apply for new credit during or soon after the event.
- A debt consolidation loan is a serious responsibility that you should not attempt unless you can comfortably afford the associated costs. Making your payments short, late, or missing them altogether (defaulting) would only ruin your finances and credit even more.
Debt Consolidation Program
If it’s too difficult to get approved for a favorable debt consolidation loan or you would prefer to avoid that kind of responsibility, you can also enter a debt consolidation program with the help of your local credit counselling agency.
In this case, a credit counsellor would reach out to your lenders and collection agencies for you. If negotiations go smoothly, you would begin a similar repayment plan, only with your installments passing through your counsellor’s hands first.
If your counsellor is a talented negotiator, they may even be able to have your outstanding balance decreased. Furthermore, a credit counsellor can give you some much-needed knowledge about money management and help you overcome all sorts of other financial problems.
Things to know about debt consolidation programs:
- These programs are not legally binding, so lenders/debt collectors are not required to accept the deal your counsellor offers. This could force you to look into more serious debt management solutions.
- Although the application process is more forgiving than with a debt consolidation loan, the procedure itself can require a bit more effort. Not only will you have to keep up with your payment regiment, but you may also have to attend a number of credit counselling sessions in order to complete the program successfully.
- A record of the ordeal will also be listed on your credit report during and for several years after the program. Additionally, any credit accounts involved with the program will be stamped with an R7 credit rating. Once again, this can cause a potential lender to deny your application or grant you a less favorable credit product until your finances have recovered.
Looking for Some Financial Aid?
If you’re interested in applying for a debt consolidation loan or program in London, be sure to contact Loans Canada first. We’re hoping to connect you with the right debt solution today!
