Best Ways to Consolidate Your Credit Card Debt
Credit cards allow people to get funds instantly and help avoid extra hustle. One day you may find yourself stuck with multiple credit debts. Such unpleasant situations require active actions and a complex approach. If you don’t want to go bankrupt, you need to work out a strategy.
Debt consolidation is a great way to quickly manage your finances and cover the existing debt. This term means combining several credit balances into new one with a more favorable rate.
This strategy makes sense if you find an option with a lower rate than you currently pay. In such a way, you will reorganize and reduce your total debt. You should know that there are different ways of debt consolidation. To find the most suitable solution exactly for you, keep reading. Below we consider the best debt consolidation strategies.
Way №1. Balance Transfer Credit Card
This approach allows you to move your existing credit limit insolvencies to a new card issued by another financial provider. This debt consolidation strategy works only with credit limits. For repaying different loan types, consider other options.
What’s more, unlike loan offers, cash transfer cards are suitable for consolidating small debt. Most issuers provide a zero APR promotional period between 15 and 21 months. If you repay the borrowed amount within this period, you won’t be charged any interest.
Note that borrowers with bad credit may not qualify for this option. That’s why check your credit score before applying for a cash transfer option.
Pros Of Balance Transfer Credit Card
A balance transfer is an excellent solution for people with multiple credit limit debts. It allows people to transfer the cash owed to one account and manage their finances effectively. Thanks to the introductory period, you can save money by avoiding interest charges. To manage it, just repay your debt within the specified period.
Another advantage of this credit is the ability to increase a credit score. It happens because of a decreased credit utilization (a measure of how much of your available credit you’re using) that serves as proof of responsible credit usage.
Cons Of Balance Transfer Credit Card
Despite many pros, there are some disadvantages you must consider before applying for a transfer option. Firstly, the promotional period is limited. If you fail to cover your debt within this term, the remaining amount will accrue interest. Keep it in mind while choosing the best way to consolidate debt. If you are not prepared for possible charges, you may end up in further debt.
Secondly, you may be charged a 1% – 5% transfer fee of the transferred amount. If you move cash with several transactions, you will pay for each of them separately.
Remember that some lenders don’t allow cash transfers between their products. In such a situation, you can move your indebtedness to an account provided by another financial company.
Among other things, credit cards won’t help you in consolidating large debt. The available limit depends on the card issuer and your credit rating.
When To Choose Balance Transfer Credit Card
Is it a good idea to use transfer credit cards for debt consolidation? The answer depends on numerous factors, including the type and amount of your debt. This option is worth considering if you have multiple credit limit debts that can be repaid relatively quickly. Thanks to the introduction period between 6 and 21 months, you can return the credit limit without paying APR.
At the same time, borrowers with different indebtedness types in their credit histories and large total debt should look for alternative solutions. As mentioned above, these options have tough qualification requirements compared to other debt consolidation solutions. If you have poor credit, a provider of services may not approve your application.
Before applying for a transfer solution, carefully learn the proposed terms and conditions. Make sure the pros outweigh the cons, and do your best to follow the probation period.
Way №2. Personal Loan
Personal loan offers are quite popular in Canada. This type of funding is marked by flexible terms and conditions. For that reason, it is frequently used for debt consolidation. A personal loan allows you to borrow between $100 and $50,000 and repay this sum in equal regular payments (installments).
If you opt for this debt consolidation option, you can cover large debts within a relatively extended period. Most lenders allow the repayment period between one and seven years. It means that by taking a personal financial solution, you can cover all existing financial gaps, including loan and credit debt.
It is essential to find an offer with lower rates and charges than you are currently paying. Thanks to this strategy, you will be able to track your finances, follow the deadlines, save on charges, and decrease the financial pressure on your wallet.
Pros Of Personal Loans
Personal loans are easy and fast to get. Most online lenders offer funds without credit checks within one business day. If you have a good or excellent score, you can qualify for offers with low interest, which is entirely beneficial for repaying loan balances.
To check whether it is manageable, find a lender with a pre-qualification feature provided by many lending companies.
Another great advantage of taking a personal loan is the repayment term. If you follow paydays, you won’t feel financial scrutiny. It will be easy to predict your regular monthly installments because of fixed amounts, interest fees, and terms. What’s more, many lenders send funds directly to creditors and help you avoid the temptation of spending funds for other purposes.
If you fulfill financial obligations, your score will increase. Consequently, after you cover the owed sum, you will be able to get approved for the next one with better conditions.
Cons Of Personal Loans
If you apply for this solution, be ready to face high fees. Personal financial solutions have a high APR that may be up to 40% and even more. Apart from this, borrowers may face an origination fee which accounts for 1%-10% of a borrowed amount.
For missed and early payments, you may also be required to pay additionally. In most cases, credit cards offer better conditions.
People with bad credit are likely to choose online lenders that don’t report to consumer reporting bureaus. If you are among such borrowers, remember that your personal loan won’t help you increase your score.
Last but not least, be aware of scammers. Look for reliable lenders and learn the customer reviews carefully. You can also read about the chosen company on the Internet, check its overall rating, and visit sites like Trustpilot.
When To Choose Personal Loan
Personal loan offers can help you rearrange different loan types, including credit limits. If you owe large amounts, this option is worth taking into account. It allows you to borrow up to $50,000 and return the amount during 1-7 years.
If you need much time to cover the borrowed amount, this debt consolidation option is for you. Available almost to any customer, this solution is quick to get. For people seeking instant financial support, this fact might matter.
Look for fixed interest rate offers to calculate your monthly installments, and don’t miss the paydays. If you follow this strategy, a personal loan may become your helping hand.
Way №3. Registered Retirement Savings Plan
A registered Retirement Savings Plan or RRSP is a savings plan registered with the Canadian government and overseen by the Canada Revenue Agency. It enables Canadians to save funds for retirement without paying taxes. There is no minimum age for joining the program, but after you turn 71, you must close the RRSP.
By the way, unlike American 401(k) loans, RRSP allows its holders to withdraw cash at any age without penalties. However, be ready to face a deferred income tax on the amount withdrawn at your marginal tax fee for the current year. The RRSP contribution limit for 2023 accounts to $31,560.
You can use this savings plan to deal with your debt. But before doing it, think about whether it won’t harm your financial stability.
Pros Of Registered Retirement Savings Plan
If you are looking for the best debt consolidation strategy, RRSP can win your heart. It is not as popular as the above-mentioned options but still deserves our attention.
The greatest advantage of this savings plan is the ability to save on rates. RRSPs usually have lower APR fees. Consequently, choosing this debt consolidation solution can reduce your monthly payments.
Among other things, unlike HELOC, this financial plan allows its holders to enjoy fixed rates through the repayment period. Another pleasant fact about RRSP is that it is relatively easy to get. Some borrowers can even get approved for more beneficial terms and conditions than they would otherwise get.
Cons Of Registered Retirement Savings Plan
For most people, RRSP serves as a guarantee of secure and financially stable retirement. They save money regularly and hope to cash them only after turning 71. Life is unpredictable, and you may need to withdraw the deposited sum earlier. If you do it, you will have to start your RRSP again and will have less time to save for retirement.
What’s more, if you opt for this consolidation model, you will lose out on interest rates. The cash you deposit into your savings plan increases thanks to the added compound interest. If you have saved a large amount, you may lose a lot of money.
Another thing for you to consider is the withholding tax. RRSP holders can withdraw cash for purchasing a first home or retirement without paying charges. But if you use the funds for other purposes like debt consolidation, be ready to pay a withholding tax.
For cashing out $5,000, you will be charged 10% of the amount; for $5,001-$15,000 – 20%, and 30% for a larger sum.
When To Choose Registered Retirement Savings Plan
Debt consolidation itself is the best way to reduce stress and lower your monthly payments, thanks to reduced rates. However, it doesn’t mean that your overall debt will decrease. RRSP may be beneficial for debt consolidation if you fulfill your financial obligations. But this option also poses the risk of going bankrupt.
Moreover, if you use your RRSP for debt consolidation, you borrow funds against your retirement. In case you leave the job, you will be required to cover the debt within a limited period. You should consider RRSP only if you have a detailed financial plan.
Way №4. Home Equity Loan Or Line Of Credit
A home equity loan or line of credit (HELOC) is another popular way to rearrange debts. It is a type of credit/loan that uses the borrower’s home as collateral. As you can guess, this option is not available to everyone and poses serious risks to people who opt for it. You may lose your property if you don’t fulfill your financial obligations.
That’s why you must learn the HELOC terms and conditions carefully before making a final decision. Home equity loans or lines of credit in Canada can be used together with the mortgage. If you choose this strategy, you will get funds against your home, repay existing indebtedness and then pay back your HELOC in regular monthly payments.
The available amount depends on a chosen lender, your credit score, income, and the property’s value. Apply to a bank or other financial institution to find out whether you qualify for this type of financial assistance.
Pros Of Home Equity Loan Or Line Of Credit
HELOC is frequently used for debt consolidation due to numerous reasons. As a secured option, it has relatively lower charges. It means that by choosing a home equity or line of credit offer, you can reduce the total amount and your monthly payments.
Another reason to opt for HELOC is the ability to get considerable financial support. If you deal with banks in Canada, you can receive up to 65% of the property’s appraised value. In some cases, borrowers can get 80% of the home’s value by combining HELOC with the limit remaining on their mortgage.
The repayment term is another reason to consider this debt consolidation solution. Most lenders provide borrowers with the ability to return the debt within 10-20 years. Moreover, most HELOCs have a draw period during which a borrower has to make only interest and principal payments.
Cons Of Home Equity Loan Or Line Of Credit
To get approved for a HELOC, you must meet many eligibility requirements. A perfect applicant for this loan type must own a home, have adequate income, and hold more than 20% equity in the home.
HELOC is typically available for people with credit scores over 620 and a debt-to-income ratio below 40%. As you can guess, not many people with financial problems can meet such criteria.
You should also know that most HELOC offers have variable interest rates. Your loan/credit fluctuates based on market conditions. In such a way, you won’t be able to predict the final cost of your borrowing.
Another disadvantage of HELOC is the risk borrowers bear. If you can’t compensate for the borrowed sum within the specified period, you can lose your home. What’s more, you may be charged additional charges for missed payments.
When To Choose Home Equity Loan Or Line Of Credit
Home equity loans or lines of credit can be entirely beneficial for consolidating debt. You should think about this option if you find a HELOC offer with lower interest than you are currently paying and more suitable repayment terms. Remember that you must have a good credit score to get approved.
It is not an option for borrowers who don’t have a regular income or are unsure whether they can afford monthly loan payments. Your home is your fortress. So, make sure you don’t put it at unjustified risk.
- When is it a good idea to consolidate credit card debt?
If you can benefit from debt consolidation in any way, do it. It is a good way to save cash on interest and avoid extra charges. If you join your balances into one, you can improve your credit score and get more appealing repayment conditions.
Debt consolidation is worth trying if you are embarrassed by paying multiple lenders and following different deadlines.
- Is it hard to consolidate my credit card debt?
Technically it is not difficult. Just apply for a new loan or credit limit, fill out a short request form, and wait for the funds. However, it may be difficult to get approved for such an option in some cases. Among possible reasons are low credit score, large debt consolidation amount, and no regular income.
- How long does it take to consolidate my credit card debt?
The process of taking a debt consolidation loan is fast. You can get approved for a new loan within 1-2 business days. But the repayment period depends on the amount you need, your income, and the chosen type of financial assistance. If you need a longer period to cover the owed sum, consider HELOC or personal loans.
- What are the risks of credit card debt consolidation?
Credit limit debt consolidation will become your helping hand only if you consider all possible risks. Remember that such steps can’t guarantee you won’t face further financial problems. If you choose an offer with a zero APR probation period, try to repay the debt following paydays. Otherwise, you may face higher charges.