The idea of consolidating multiple, small debts into one manageable debt makes a lot of sense to North Americans. Although it significantly simplifies your finances and saves your money in terms of interest, it can also come with its own complications.
Borrowers often worry about the effect of debt consolidation on their credit score. When not planned, debt consolidation can negatively affect your credit history. However, some research paired with good financial habits can save you from lowering your credit standing.
This article will help you with some tips and insights to consolidate your debt without ruining your credit score. Meanwhile, you can explore the best options for debt consolidation through this website.
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How to consolidate debt without hurting your credit?
Debt consolidation includes taking out a big, low-interest loan to pay off multiple, small, high-rate debts. Multiple debts, including outstanding credit card balances, high-interest personal loans, or other consumer loans, can be consolidated through a debt consolidation loan.
If you follow the good financial habits mentioned below, you can avoid hurting your credit score. Here are some tips to smoothly sail through your debt consolidation journey.
Avoid multiple inquiries
Although the addition of a new credit account negatively impacts your credit history, it is only temporary. What makes a more lasting impact is having too many hard inquiries in a short period. These inquiries can definitely lower your credit score significantly, so unless the situation warrants it, only provide consent sparingly to make hard inquiries on your account.
Avoid higher credit utilization
If you opt to consolidate your debt through credit card balance transfer, do not utilize the new credit card balance beyond 30% of its limit. Higher utilization has a negative effect on your credit history. Similarly, do not avail big loans out of your repaying capacity.
Make on-time payments
After availing of a debt consolidation loan, making monthly payments on time is imperative. Positive payment history increases your credit score and vice-versa. Moreover, you may not get approved for debt consolidation if you have a bad credit score.
When you follow these financial practices, debt consolidation has the potential to improve your financial situation as a whole, which in turn improves your credit score. So, let us explore some of the popular ways to consolidate debt in Canada.
4 strategies to consolidate debt
As per your needs and financial situation, you can choose one of the following options to consolidate debt.
Debt consolidation loan or personal loan
When taken for the purpose of debt consolidation, a personal loan can be termed a debt consolidation loan. It is a good option to consider if you get a good interest rate. Again, the chances of approval and rates of the personal loan depend on your credit score.
Sometimes, stringent rules make the whole process complicated. Fortunately, there is an easier and quicker way of debt consolidation in Canada – a Home equity loan.
Home equity loan or home equity line of credit (HELOC)
If you own a home, you can tap into your home’s equity to consolidate your debts. Moreover, you can get the best rates and fastest approval through this option. Even an individual with a low credit score can avail of a home equity loan without hassle.
Similarly, you can also avail a home equity line of credit by tapping into your home equity. However, you do not get a lump sum amount. Instead, you get a line of credit. Like credit cards, interest will be charged as per usage.
In both options, it is important to note that your house will be collateral for your loan. Thus, you can end up losing your home if you fail to oblige your liabilities.
Balance transfer
A credit card balance transfer is another viable option to consolidate debt. You will be provided with a credit card with low or no interest for a promotional period. It is an excellent option to consolidate high-interest credit card outstandings or smaller high-interest loans.
However, you may have to pay a balance transfer fee of up to 2-3% of the transfer amount. Again, a good credit score is a prerequisite to getting approved.
Debt management plan
If any of the debt consolidation options doesn’t work for you and it becomes difficult for you to manage your debts, you may consider a debt management plan. In this program, a debt management agency negotiates with creditors on your behalf to make the debt repayment more practical for you. However, this option is not available for every borrower.
Best practices for debt consolidation
Although debt consolidation is a complex task, the process becomes more manageable with the right strategy. Here are some tips to make this process less intimidating.
Do the maths first
Go through all debt accounts and add the remaining principal and interest. Similarly, add the monthly payments to get an overview of your obligations. After that, do the comparative analysis between current and post-debt consolidation payments. If debt consolidation makes sense, then move to the next step.
Shop around
Whatever the option you choose for debt consolidation, do a market survey to get the best offers. For this, research and compare an offer from different lenders.
Adhere to the repayment plan
After the debt consolidation process ends, stick to the repayment plan without any failures. When you strictly adhere to the payment plan, you can become debt-free as per your strategy.
Do not fall into a debt trap
Debt consolidation is not the final solution. It is your good financial habits that decide whether you live debt-free or not. Therefore, utilize debt consolidation for its purpose only.
Endnote
With the right strategy, debt consolidation is a great tool to streamline your finances. Unlike popular belief, debt consolidation doesn’t hurt your credit score significantly. Instead, when you stick to sound financial practices, it helps in improving your credit score.
There are several options for debt consolidation in Canada, a home equity loan being one of the most popular ones, so it’s best to shop around and compare to get the ideal rates on debt consolidation loans.
