Is Fear Holding You Back from Consolidating Your Debt?
Q: It’s been another one of those where-did-the-year-go years. I had a number of items on my “to do” list this year that got done and some that didn’t, including getting my finances in better shape. I’ve been carrying about $20,000 of mainly credit card debt for the last few years and I finally woke up to the fact that the reason I’m not getting ahead financially is due to the amount of debt I have and the interest I’m paying out each year; it’s over $4,000! I know I’ll pay a lot less interest if I consolidate my debt at a lower rate. I have no idea if I will qualify for a consolidation loan, but my bank is always sending me offers in the mail to borrow money and I always pay my bills on time. With Christmas coming up though, does it make sense to deal with my debt in the new near when it’s less busy? ~Enzo
A: Christmas and the holiday season is a busy time of the year for most people and it would be easy to justify to yourself why you should wait until the new near to address your debt situation. My response to you is “there is no time like the present to deal with your debt.” I also can’t think of a better gift for yourself this holiday season than to have financial peace of mind as a result of taking action to pay down your debt and regain control of your finances.
What is holding you back?
This has been on your mind for some time and yet, you’ve done nothing about it to date. Stopping a lot of people is fear; the fear that they won’t qualify for a loan or qualify for a loan at a good rate. Or it could be the fear that they won’t be able to avoid the temptation of continuing to use their credit cards, have the discipline to pay down their debt, and make their situation worse. For others, it could be that they just need a nudge in the right direction to move forward and consolidate their debt.
From a practical perspective, why would you want to put this off? You’ll continue to pay over $300 in interest charges each month and you’ll also run the risk of delaying this further than the beginning of the new year because we tend to put off the things that take a lot of work or make us uncomfortable. This has been on your mind all year. The truth is that your financial situation is not going to change for the better unless you take positive steps forward.
To help you, I’ve outlined some tasks to accomplish that will eliminate the financial fears of applying for a consolidation loan:
1. Obtain a copy of your credit report
The process of qualifying for a loan can be intimidating for a lot of people as it’s more involved than applying online for a credit card. Before contacting your bank or another lender I would encourage you to obtain a copy of your credit report from the two credit bureaus in Canada; Equifax Canada and TransUnion of Canada.
These credit bureaus will have a record of your active and past accounts in your name, the balances outstanding on your accounts, and your current and past payment histories. You can request a free copy of both or go online and pay for a copy of your report immediately. You can also pay to obtain your credit risk score. Credit risk scores range from 300 – 900 points. The higher your risk score the more likely you are deemed to be able to repay the credit your name.
Each credit bureau company calculates your credit score slightly differently and each lender interprets credit scores according to their own lending criteria. Generally speaking, a score of 660, for instance, is considered a good credit score and a score of 725 or higher is considered excellent. Knowing that your credit report is accurate and reflects that you pay your bills on time is an important step in moving forward and applying for a consolidation loan.
2. Know what information your financial institution will need to process your loan request
With a review of your financial institution’s website or contacting their customer care centre you will be able to determine what information they will need to assess your loan request. They may ask to see your most recent tax return and T4 slip or a copy or two of a recent pay slip. They will also ask for a list of the assets that you own and the outstanding debts in your name. They will already have your banking information on hand (if you apply for a loan where you do your banking) but will need your authorization to access your credit report. They will also likely want to understand what your monthly housing costs are. Getting your documentation together in advance will make the loan application process smoother.
3. Know what is and isn’t a competitive interest rate
There are websites that publish the loan interest rates offered by different financial institutions and online lenders like ratesupermarket.ca (be sure to check Canadian, not American, websites). The rates vary from lender to lender but this will give you a sense of the rate you may be offered by your financial institution. You can also contact your financial institution and ask them to provide you with the rates on their loan products. They won’t, however, be able to quote you an exact rate until you have given them a complete overview of your financial situation and allowed them to access your credit report.
4. Determining your budget before you apply for a loan
The last step before speaking with your financial institution is having a good understanding of your income, monthly, seasonal and irregular expenses, and knowing how much of a monthly or bi-weekly loan payment fits your budget. It’s a common mistake to be overly aggressive in wanting to pay off your debt quickly and have a monthly or bi-weekly payment that takes too big of a bite out of your pay cheque. This often leads to feeling forced to use your credit cards to cover off shortfalls and unforeseen emergencies which defeats the purpose of consolidating your debt. If you aren’t currently using a budget here is a link to help you build a budget that works that will help you get the most value out of the money you earn and manage your expenses effectively.
5. Applying for a consolidation loan
You’ve done the work and now have a complete understanding of your credit report, your finances, and the documentation your financial institution needs from you. All that’s left is to take the step and speak with your financial institution. When speaking with the lender they may offer you additional products like loan protection insurance. This is not a mandatory product and will add cost to your loan. The best loan protection insurance is having an emergency savings fund to manage life events. They may also recommend a line of credit instead of a loan. A line of credit works the same as a credit card - it has a maximum limit but as long as you maintain the minimum monthly payment the account stays open. If your goal is to get out of debt, stick with a debt consolidation loan.
If the rate offered does not seem competitive with the information you’ve gathered, share your thoughts with the bank representative and let them know you were looking for a lower rate. It never hurts to ask for a lower rate, and you may be pleasantly surprised when you do. If they aren’t willing to give you a better rate you may be better off applying for a loan elsewhere.
The bottom line on consolidating your debt before the new year
While navigating the process of consolidating your debt may be a new experience for you and make you a little uncomfortable, once you’ve set yourself up for success your uneasiness will be replaced with a sense of confidence. With confidence you can push procrastination aside and move forward turning your debt situation into a debt solution.