How to Consolidate Credit Card Debt in Canada

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Ever wondered how to consolidate credit card debt in Canada? Debt is a huge financial issue in Canada as most credit card users owe their issuers one loan or the other. It is almost inevitable since most issuers make repayment easy, and there are different terms designed to suit your financial situation.

Credit card debts usually arise from the numerous interest attached to credit cards and their high rates. Once you find yourself in credit card debt, there are different available options you can choose to free yourself from the debt. And debt consolidation is one of them. Let’s take a walk through debt consolidation and how it works in Canada.

What is Debt Consolidation?

Credit card debt consolidation refers to a situation whereby you have balances on numerous high-interest cards, and you want to combine (consolidate) all the outstanding balances into one. Debt consolidation makes it easier and more affordable for you to make payments. 

Consolidating your credit card debts means that you’ve merged all of your balances on different credit cards into one. Debt consolidation doesn’t make your debts go away; your debts still exist. Rather, instead of having it spread across other cards, it is combined into one card. You will still need to find a way to pay your debts after consolidation.

Consolidating your credit card debt is not limited to one way, and there are different ways you can do it. But before that, let’s look at some of the reasons why you may want to consolidate your credit card debt.

Reasons for Consolidating Your Credit Card Debt

Debt consolidation might be suitable for you if you are sure you can get a lower interest rate from your issuer. This will help you lessen your total debt and restructure it so your repayment will be more manageable and swift. 

Alternatively, debt consolidation can come in handy if you are dealing with a considerable amount of debt. In this case, you can use debt consolidation to regroup multiple bills with different interest rates, payments, and dues dates.

There are different reasons for which you may want to consolidate your credit card debt. They include;

  • It reduces the number of monthly payments you need to make to your credit card accounts, thereby making it easy for you to track and manage your finances.
  • A way to get lesser interest rates – Debt consolidation helps you get a lower interest rate by merging all your balances into one. This, in turn, enables you to save money.
  • Your inability to afford the debts accrued on your accounts
  • It is an alternative for filing bankruptcy 
  • Wanting to get out of debt faster

Whatever your reasons are, you can consolidate your credit card debts in the following ways.

Debt Consolidation Requirements

To consolidate your loan, you must have the required income and creditworthiness, especially if you are using a new lender.

Note that your application process and documentation will depend on your credit history. Generally, below are the information you’ll need to consolidate your debt in Canada:

  • Letter of employment
  • Statement of every credit card or loan you want to pay off (dating from two months before your application)
  • Letter from lenders or repayment agencies

Once you commence your debt consolidation, it is essential to note the lender who you will pay off first. In most cases, your lender can choose the order of creditors to repay.

If this is not the case, it is advisable to pay off your highest-interest debt first. You can pay off a lower-interest loan if it is a priority to you instead of paying off those with higher interest.

How to Consolidate your Credit Card Debt

You can consolidate your credit card debts in the following ways;

  • Debt Consolidation Loan

If you want to consolidate your debt through this means, you will have to obtain an unsecured personal loan. This option is, however, better recommended for persons with good credit scores.

This doesn’t mean that you won’t qualify for the loan if you have a bad credit score or less-than-average credit score.

It only means that your credit score determines the amount of loan you will get. It also depends on the amount of credit card debt you have; hence you should be wary of high-interest loans. You don’t want to add to your already existing large debt. 

  • Debt Management Program

A debt management program is a better choice if the amount of credit card debts you want to consolidate is high. It involves seeking the help of a trained professional like a creditor counselor.

Your counselor will help you kick start the process by assessing your finances, creating a personalized plan for you, and even negotiate with your credit card providers to ease the process.

You will then make payments to the counselor, who will, in turn, distribute the money accordingly. Ensure that you employ the services of a reputable company.

  • Credit card balance transfer

This method allows you to transfer the balances from all of your credit cards into a new credit card.

This new credit card will have a low interest rate. With the low interest rate, you will be able to save money you pay on interest charges.

However, this option is dependent on ensuring that the new card has a lower interest rate to avoid making payments at the previously high rate. Hence, you must be aware of the fees associated with the balance transfer.

There are balance transfer credit cards in Canada with low fees and even offer interest-free welcome periods for their new customers. It will be great to pay up all the balances during the interest-free period to save money.

  • Line of Credit

Line of credit – Specifically, a home equity line of credit. This is for homeowners who want to use the equity they have built up by paying off a mortgage to secure a line of credit or loan. 

Line of credit is quite risky as you will put up your house as collateral. However, on the other hand, you have a high chance of getting your loan approved and access to a large amount of money.

The interest rates are also lower. This works in the same way as a debt consolidation loan does. Ensure that you do not default on the loan so you don’t end up losing your home.

Whichever option you go for, remember that your debt still exists after consolidation. So, it would help if you also thought of ways to pay off the debt. 

Below are some ways by which you can pay off your debt:

  • Put your assets up for sale (as long as you can do without them)
  • Reduce your spending and cut costs

How Credit Card Consolidation Can Affect your Credit Score 

Whether the effect of your credit card debt consolidation will reflect positively or negatively on your credit score is dependent on the method you employ to consolidate your debt.

One method which may negatively affect your credit score is the debt management program because it remains on your credit report for three years after the repayment of your debts.  

A debt consolidation loan or credit card balance transfer can positively affect your credit score gradually, depending on how much your debt is. All in all, remember that being debt-free trumps having a good credit score.

Generally, debt consolidation can help your credit score. This is achievable by paying off the principal debt portion sooner to keep your interest payments low. Doing this will help boost your credit score, in turn making your credit report more appealing to potential lenders.

Nevertheless, if you roll over existing debts into a new one, it might impact your credit score negatively. Also, closing your old accounts and opening a new one may reduce the amount of credit available. This will, in turn, increase your debt-to-credit utilization ratio.

Tips for Credit Card Debt Consolidation

In choosing the right option for your credit card debt consolidation, we recommend these tips to help you make the right decision;

  • Your payment plan should be fixed so you can know when you will be able to pay off the entire debt and be debt-free
  • Choose an option that you are well informed about and that you know you can afford easily.
  • Your choice should be dependent on your lifestyle, income, and financial management techniques.
  • Your choice should be the quickest way to get out of debt

Conclusion 

When it comes to credit card debt consolidation, the interest rate and monthly payment are part of the special perks borrowers enjoy. However, it is crucial to pay attention to the payment schedule as the longer your payment schedules, the more you will pay in the long run.

Although credit card debt consolidation doesn’t make your debts go away, it makes it easier to manage your debts from one account.

However, after debt consolidation, try your possible best to not fall into debt again. Also, choose the best consolidation option that works for you. You can always speak to your credit card issuer(s) to learn more.

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Avid researcher, freelance writer, and personal finance enthusiast passionate about financial education and literacy.

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Kareena Maya

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.