When you come to the decision that consolidating your debts is your best options for getting back on your feet, it is important to understand common debt consolidation mistakes that you should watch out for.
Here are four of the most common mistakes we see with debt consolidation:
- Not considering all of your options
When consolidating your debts, there are numerous options for you to choose from. These may include opening a line of credit, signing up for a secured or unsecured loan with the band, or accumulating all of your credit card debts onto a single card in a balance transfer. In addition, a debt management program or a consumer proposal can also function as a form of debt consolidation as well. That being said, often the Consumer Proposal should only be considered as an option once all other options have been crossed off the list.
When trying to decide on the best way to consolidate your debt, we recommend first meeting with a credit counsellor. A credit counsellor will help you create a realistic budget to help you live within your means, and ensure that spending stays within their income while exploring the numerous options to get out of debt. It is a common occurrence for people to re-accumulate their debt at the same time they are attempting to pay off their consolidation loan by spending more money than they earn.
Do not feel pressure to jump into the first option that arises. Taking time to understand and compare interest rates, fees, benefits and drawbacks, you will be able to feel more at ease once you decide on the option that’s best for you.
2. Not limiting your credit use
If not done correctly, debt consolidation can be risky. If you are really committed to starting out fresh, you can begin by closing up any credit cards you don’t need, and trying your best to reduce your temptation to spend.
If you go the route of closing credit accounts, your credit score will lower. It is a good idea to keep a single card open, more specifically, the one that has the longest credit history. While closing all of your accounts might not work for all people, if you are worried about spending it might be the best option for you.
- Not understanding how you got into debt in the first place
It is important to take a long look at your habits and your lifestyle to understand how you got into debt in the first place. Without a solid understanding on how you found yourself in your situation, it will be impossible to make steps towards fixing it.
Debt consolidation is the perfect time to reflect on your finances and look at where you went wrong and what you can do in the future to avoid making the same mistakes. Tracking your spending can be a very useful way to recognize where your funds are going. The results may be surprising. Identifying the negative patterns is the first step to creating a new plan or budget to get you back on track.
- Not creating and dedicating yourself to a payment plan
A consolidation loan can take a long time to pay off, especially if you are making minimum payments monthly. The journey to becoming debt free isn’t easy or quick, especially if you are still adding on more debts during the process.
Create a debt repayment plan, either by yourself or with the help of a credit counsellor, based on a determined amount you can realistically repay monthly. Create a budget, set a deadline, and reflect each month to see if you are hitting your goal.
Stay accountable and stay focused during this process. Make sure to weigh all of your different options and decide which is best for you. If you need the help of a credit counsellor, help is available.
Call us today!