A new report was released in June that found Canadians owe $1.67 for every $1 of disposable income. With interest rates at historic lows, Canadians are having an extended love affair with red ink, and the passion isn’t slowing down anytime soon. It’s just getting worse.
Consumers tend to lay the blame on a wide array of factors for their debt woes: stagnant incomes, the rising cost of living and the need for a Cadillac smartphone data plan.Whatever the excuse may be, you are in debt and it is up to you to become debt-free.
One of the most common solutions for Canadians today is debt consolidation. This is when you essentially put all of your debts into one giant pile and make a single payment each month. It sounds simple, correct? Well, there are several elements that every consumer needs to know.Here are five things you must know before you start debt consolidation:
1. Discover the Root of Your Money Woes
It is great that you want to get out of debt and that you’re using the power of debt consolidation to achieve this. However, if you get out of debt and then go right back into red territory a month later then you haven’t really accomplished anything at all. Your money woes are rampant.
Ultimately, when you’re in the beginning phase of debt consolidation, the first step you must take is combing through the root of your pecuniary difficulties.
When you launch this investigation into your fiscal problems, you’ll find quite a bit of details:
- You spend way too much on daily coffees before work.
- You waste money on cable television, unused gym memberships and data plans.
- You’re reckless with your credit card – you use it for everything.
- You do not maintain a budget for your lifestyle.
- You do not have a savings account, emergency fund or any investments.
It is true that you are not alone when it comes to these, but it’s time to rectify the situation.
2. Your Credit Score Will be Affected
Debt consolidation will impact your overall credit score and will reduce the worthiness for a short period of time. This is because your creditors have chosen to either suspend or shut down your accounts while you’re consolidating your debt for the next year or so.
Simply put: you are going to rely less on credit and more on physical cash.
3. Not All Debts Need Consolidation
A common error that consumers make when consolidating their debt is thinking that all of their debts can actually be consolidated. It is true that they can, but do they really need to be? Nope.
Here are some examples of debt that don’t need to be consolidated:
- A credit card that has a $750 balance.
- An old cellphone $120 bill from three years ago.
- An unpaid $350 line of credit.
These are just some examples of debts that don’t to be consolidated. Why? Because they’re small. With a little bit of hard work, you can easily pay these debts off immediately.
4. Refrain from Going into Debt
Another mistake that many Canadians make when they’re finally debt-free thanks to consolidation is that they right back into debt. Perhaps this is in relation to the initial point, but if you don’t get a handle of your finances then you are doomed to repeat these fiscal errors.
Debt consolidation is just the first step to get out of debt. It is now up to you to be debt-free.
5. Choose the Right Professional
Finally, you will want the right professional to help guide you and ensure you’re getting the best deals and rates possible. You should also want somebody who understands your needs, can come up with a great plan and know what your primary goals are.