Did you know that one of the biggest problems that Canadians deal with financially is debt? According to Equifax Canada , the average debt per Canadian is $15,473, and that number is expected to rise.
Are you looking to consolidate your debt to get out of financial turmoil? Congrats, that’s a big step and one you should be proud of.
With the necessary commitment, educating yourself on debt consolidation, and avoiding common mistakes, it’ll make the process of getting out of debt much easier and smoother.
The team at LendingArch is here to help you in this process. In addition to connecting you to lenders who specialize in debt consolidation, our friendly and professional customer service representatives are here to answer any questions you may have.
Read on to learn more about this process along with key mistakes to avoid.
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Debt Consolidation 101
Consolidating debt is the process of merging all debts (whether it’s from credit cards or personal loans) into one single loan. Why would someone be interested in this? The main benefit is one fixed monthly payment.
Basically, that means you’ll have less to manage which will result in less stress.
Another benefit to debt consolidation is the ability to reduce interest rates. Normally, it could take years and years of minimum payments to be free of this kind of debt. With debt consolidation, you will save both time and money.
Lastly, you’ll be able to take back control of your life. Getting a debt consolidation loan means that you can choose your monthly payment and improve your credit.
Commitment to Debt Consolidation
Now that you know what debt consolidation means, let’s talk about the commitment it takes.
While getting out of debt might seem like a straightforward process, it does involve more than just simply paying off credit cards and financial institutions.
In order to successfully pay off debt, one must be committed to:
Changing spending habits.
Learning how to budget, including creating one and sticking to it.
Creating a list of who you owe and how much. You can even take this one step further and prioritize the debt that you need to pay off first.
Establishing an emergency fund – you never know what life will throw at you.
Planning for the future. Even if your current situation seems dire, you still need to think about your future, which includes a retirement plan.
Analyzing how you got into debt in the first place. This might be the hardest to come to terms with but recognizing and facing your problem will help make sure you don’t repeat past mistakes.
Finding a trusted person you can go to in case you get off track. This person can be a family member or close friend, any one who you feel comfortable talking about your finances with.
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12 Common Debt Consolidation Mistakes
Even after all of the above items are addressed and you have a plan in place, there are some other items you’ll need to avoid in order to make sure you don’t accumulate more debt.
Mistake #1: Not Comparing Multiple Loan Offers
We understand that if you’re in a lot of debt, you might feel some sort of desperation to get out of it as soon as possible. This can oftentimes result in accepting the first debt consolidation loan offer, which can be a costly mistake.
We recommend that you shop around and go to several different loan companies. That way you can find the best interest rates and terms.
Mistake #2: Not Understanding Debt Relief Programs
Unfortunately, there is no quick-fix solution to debt relief. Should you come across a company that offers you a solution that seems too good to be true, it most likely is and we recommend that you look elsewhere.
First things first, if you do want to look into a debt relief program, know that they usually take 3-5 years. Before choosing one, make sure to do your homework and ensure that the company is licensed and has good reviews by checking sites like the Equifax Canada.
You can even ask trusted credit unions, military bases, and close friends for recommendations on debt relief programs.
Mistake #3: Not Addressing Credit Report Issues
We know that looking at your credit report might bring up some emotional issues, but you should check it every four months to make sure there aren’t any inaccuracies.
With Equifax, Experian, and TransUnion, you’re entitled to a free credit report. When reviewing your report look at it closely to see if there are any balances that are negatively affecting your score or ability to obtain a loan.
Mistake #4: Continuing to Use the Credit Cards You’re Trying to Pay Off
While it might be tempting to still use those credit cards to earn extra rewards such as airline miles or cash back, the extra interest you’ll accumulate far exceeds any of the rewards. Not even paying off the new charges each month coupled with another amount that pays the old balance will work.
In order to get out from under your debt, you’ll need to stop using your credit cards entirely.
Mistake #5: Getting a Home Equity Loan
Swapping out all debt for one single home equity loan might feel like the best solution to your debt consolidation needs; however, a home equity loan simply adds more to your pile of debt.
Going this route would just swap out the kind of debt you owe. Additionally, this type of loan could put your house in jeopardy thus adding more stress and pressure.
Mistake #6: Using Your 401(K)
Your 401(K) is established for your future so you can enjoy retirement debt-free. Borrowing against it would be a huge mistake. Why? Not only will it leave you ill-prepared for the future but you will be losing money from the compound interest that will accumulate.
Other repercussions that could take into effect include:
The money paid towards the interest could be taxed twice. Since this money is technically after-tax dollars, you’ll be taxed again when you take distributions during retirement.
Should you get fired or quit your job, you’ll have only a short amount of time (typically 60-90 days) to pay it back. If you don’t or can’t, the amount you borrowed will be a taxable distribution with a 10% penalty if you’re under a certain age. This, unfortunately, will only make your debt worse.
Mistake #7: Continuing To Build Up Debt
In the debt consolidation process and aftermath, it’s important to stop using all credit cards and to not take out any additional loans. In doing so, you’ll be accumulating other types of debt and will cancel out any progress you’ve made.
While it might be hard to stop using those credit cards, when dealing with debt, you’ll need to stick to paying in cash only.
Mistake #8: Not Setting Up Automatic Payments
Missing payment due dates are detrimental for two reasons: 1. You’ll have to pay a late fee (resulting in handing over more money, unnecessarily, and 2. Late payments will reflect poorly on you and your credit score.
In order to prevent this, we recommend that you set up automatic payments for any and all bills that this applies to. This method of paying will allow you to save more money (which can go towards paying off more of that debt), but it will also help to ease your mind of remembering when you have to pay.
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Mistake #9: You Give In Every Time Someone Asks You To Do An Activity
We aren’t saying that you can’t have fun, you just have to be extremely careful about your spending. This applies to your social life.
We know that it might be hard to turn down a shopping spree with your best friend or coffee date with your mom, but by doing so you’ll be thankful.
Of course, there are some creative ways to still have fun: go to dinner during happy hour or you can even find and use coupons.
Mistake #10: You’re Waiting To Earn More Money
Earning more money means that you can pay off your debt quicker! How can you earn more money?
Ask for a raise. The worst your boss can say is no.
Get a part-time or freelance job. Of course, we don’t want to burden you (or your time) with more work but working an extra 10-15 hours per week can help you earn some extra cash.
Reallocate unbudgeted income. Did you just receive a bonus, tax refund, or inheritance that you weren’t expecting? Instead of planning a week-long vacation, allocate those funds to your debt.
Sell old items. Overtime we all accumulate stuff. Any items that you haven’t used in over a year (appliances, clothes, toys, etc), you can sell in a garage sale.
Of course, this is easier said than done. Before you start making more money, it’s important to make sure you’re in the right mindset so you don’t acquire more debt.
Mistake #11: You’re Slowly Paying Off Debt
In this case, slow and steady doesn’t win the race. Of course, we’re not implying that you need to pour all of your available cash into your debt all at once either – you should come up with a strategy and payment plan.
There should; however, be a fire under your belt that makes you want to pay off all debt as quickly and effectively as possible.
You should be so focused on this end goal that you aren’t tempted to buy yourself a treat until after all of your debt is paid off. This intensity will produce positive results.
Mistake #12: You’re Paying More Towards Interest, Not Principal
Oftentimes with paying off debt, you can pay more than just the normal monthly required payment. This is great to help ease the burden of your debt but only if that extra amount goes towards paying off the principal.
Why? Principal is the actual amount of money that you originally borrowed. By doing so you’re lowering the amount of money that you’re paying interest on thus reducing interest accumulation and faster debt payoff.
When paying extra payments make sure that you’re not getting charged more to do so, and make sure that you check any box indicating that the additional amount goes towards principal.
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Help is Here
Now that you’ve learned all about debt consolidation and know some of the most common mistakes people make, it’s time to get started.
Are you ready to consolidate your debt, but looking for advice and help from an unbiased third party? We’re here to help. Check out Equifax Canada from LendingArch.