With the high – sometimes extremely so – interest rates credit card companies charge, falling behind on a few payments can lead to a seemingly insurmountable debt load. If debt is keeping you up at night, you may have seen some commercials for debt consolidation loans on TV. Before you pick up the phone on the promise to wipe your debt away and call off the creditors, it's important to understand the pros and cons, along with the steps taken to consolidate credit card debt.
The main advantage of consolidating your various loans is that they’ll all be pulled together under one (usually) lower interest rate than you were paying previously. The institution that holds your consolidated loan will pay off all your creditors in full, and you’ll pay the loan provider directly. You’ll spend less of your money on interest and will be able to avoid late payment charges.
The second advantage is that if you consolidate your loans soon enough, you can avoid – or at least minimize – the damage to your credit rating. Finally, the payment process becomes much more simplified; you make one monthly payment instead of having to track several.
There is, of course, the danger of paying of your various loans and then continuing your bad financial habits and racking up more debt on your newly balance-free credit cards.
Unfortunately, there are also scammers out there preying on the debt-stressed. The Ontario Ministry of Consumer Services has received so many complaints that it issued an alert warning people “to exercise caution when considering a contract for debt settlement services…. Most of the complaints are about unclear or misleading contracts, excessive fees, and failure to reduce debts as promised.”
Keep this old adage in mind: if it sounds too good to be true, it probably is. Rather than taking a chance with some fly-by-night company, you’re better off trying to settle your debts with a legitimate loan arranged through a recognized financial institution. They won’t promise to magically wipe away 90% of the debt you owe, but you will gain all the above-mentioned benefits by risking falling victim to a scam.
If your debt issues are bigger than simply pulling together everything in one account, you’ll want to meet with a credit counsellor. You can find one at the Canadian Association of Credit Counselling Services site. In extreme cases, they may refer you to a bankruptcy trustee who can see you up with a consumer proposal (also known as a consolidation order, orderly payment of a debt, or a voluntary deposit service). In a last step to avoid bankruptcy, many provinces have established these formalized debt consolidation plans that are mediated by a bankruptcy trustee.