Credit Consolidation

Many thousands of Canadians opened new credit card accounts or took out unsecured personal loans to pay for big-ticket purchases during the boom times of the mid-2000s. If you’re one of them, you may be kicking yourself for unwittingly digging yourself into debt.

Don’t be so hard on yourself. The recession that followed the recent financial crisis didn’t hit Canada as hard as it hit Europe or the United States, but reduced global demand for the country’s exports of oil, timber and auto parts was enough to cripple the balance sheets of many big Canadian businesses. Even in oil-rich Alberta, where the unemployment rate remains far below the national average, things aren’t as good as they used to be.

If you’re struggling with serious credit card debts or other unsecured obligations, stop blaming yourself for your predicament and start researching your credit consolidation options. You have several different means of escaping debt at your disposal, including debt consolidation loans, credit counseling and debt settlement.

Unless you’ve been living under a rock for the past decade, you’ve seen TV ads, billboards and online banners that blare on about the supposed benefits of taking out a debt consolidation loan. This most popular of credit consolidation options has some inherent advantages, but it’s been known to cause some nasty unintended consequences as well.

When a bank or other private lender agrees to extend you a debt consolidation loan, they’ll generally provide you with enough cash to pay off each of your existing creditors in full. Your loan provider will then expect you to repay a portion of your loan each month according to a pre-set repayment schedule, a process that can take years and cost you thousands of dollars in additional interest charges.

The interest rate on your loan may vary depending upon your credit score and location: If you live in booming British Columbia or any other pocket of prosperity to the west of the Great Lakes, you may be able to secure debt consolidation credit at a significant discount to the national average rate.

It’s best to secure your debt consolidation loan before your debt situation becomes dire as lenders are understandably reluctant to fork over large sums of money to folks who appear ready to default on their obligations. Generally speaking, your probability of securing a debt consolidation loan is inversely proportional to your credit rating.

Your hometown’s economy is important too: You’ll be less likely to pass a debt consolidation lender’s means test if you live in a downtrodden northern Ontario mining community with few realistic job prospects.

Unlike private debt consolidation loan providers, most credit counseling services are not-for-profit. This doesn’t mean they’re particularly cheap, however. Credit counselors work with your creditors to refinance your debts, theoretically reducing the interest rates on your outstanding balances.

Credit counseling offers a few key advantages over debt consolidation loans and last-resort bankruptcy filings. While it’s hard to secure a debt consolidation loan for less than $10,000 and virtually impossible to do so if you have poor credit, credit counseling services eschew such limits.

Credit counseling should reduce your monthly debt payments somewhat, but your savings probably won’t be drastic. If you’re currently carrying an annual interest charge of 20 percent on a balance of $15,000, you’ll save about $1,500 if you’re able to reduce your interest rate by a factor of two.

This might seem like serious savings: After all, $1,500 in annual savings adds up to $7,500 in just five years. You could buy a gently-used car with that kind of money.

Unfortunately, slowing the growth of your debt by reducing your effective interest rate does nothing to address the underlying issue. If you simply hang on and make your minimum monthly payments, you’ll do little more than cover the new interest charges on your account.

When you’re ready to get serious about controlling and eliminating your debts, opt to reduce the actual amount that you owe your creditors with the help of a debt settlement specialist. From New Brunswick to Saskatchewan, the debt settlement process takes anywhere from 12 to 48 months and can reduce your total outstanding debts by 40 to 60 percent. In other words, you may be able to wash your hands of a $15,000 debt disaster by making a single payment of just $7,500.

Your personal financial situation is unique, characterized by a particular mix of credit card debts and unsecured loans. Although debt settlement is a cost-effective credit consolidation solution that usually takes less time to work through than an expensive debt consolidation loan or uncertain credit counseling workout, you may prefer to try your luck with another option. Before you start daydreaming about a debt-free future, consider all the facts and choose your next move carefully.