Debt Consolidation and Your Credit Score

Improving their credit score is one of the top reasons why most people decide to consolidate debt. The fact is, improving your credit score is possible with long-term debt consolidation; however, you have to be careful because your credit score can decrease with short-term debt consolidation.

Can Consolidating Debt Hurt Your Credit?

Do you know that creditors make it a point to do a hard credit check on you whenever you take a new card or loan? This lowers your credit score temporarily. Getting a balance transfer can lower it even more since it is viewed as a new credit card. If your transferred balance is quite a lot, that can further hurt your score because that will register as a high credit utilisation ratio. You should take all these factors into consideration more so if you’re planning on getting another loan in the near future.

Can Debt Consolidation Help Your Credit?

You can improve your credit with debt consolidation because it helps you pay your loans on time and do so quickly. On-time payments have a huge positive impact on your credit rating. Basically, you want to have as little debt as possible to effectively improve your credit score.

Things to Avoid for Better Debt Consolidation

The most likely reason why you want to consolidate debt is to improve your finances. If this is your goal, you’ll want to take note of the following:

  • Avoid consolidating debts that don’t need consolidating. Examples are debts with low-interest rate and debts with low balances because the possible savings is not large enough to cover the effort and fees associated with debt consolidation. A 0% introductory interest rate may seem appealing but if the normal interest rate is higher than what you are currently paying, then you won’t really be benefiting in the long run.
  • Avoid spending carelessly. The most likely reason why you got into debt is you spent beyond your means. If you do not acknowledge that your spending habits need a revamp, then you’ll have a harder time managing money and improving your credit score.
  • Avoid forgetting to loan enough to cover your full original debt. A lot of people forget that their loan comes with an origination fee (about 5%) and so borrow $20,000 to cover a $20,000 debt. You’ll fall short of fully consolidating your debts if you forget details like this.
  • Avoid consolidating debt by using a method that does not fit with your financial situation. If you go with a debt consolidation method that does not really work for your specific situation, you might end up with more debts and a worse credit score. This is why consulting debt consolidation professionals is an investment worth making.
  • Avoid expensive debt settlement programs. There are many options for debt consolidation. A good example is using your home equity to consolidate your debt. If you use a debt consolidation program without exploring better options, you can end up destroying your credit in the long run.

Thinking about consolidating your debts but not sure where to start? Contact us at Mortgage Central Canada so we can assess how to best consolidate your debts and discuss your debt consolidation options with you.

Your Guide to Debt Consolidation

Debt consolidation is a means to get out of debt faster by combining multiple debts into a single loan with easier payment terms. By combining several debts into one, you will find it easier to handle your monthly budget and enable you to set aside more money towards loan repayment.

How Does Debt Consolidation Work?

The most common way to consolidate debt is by taking out a debt consolidation loan. A debt consolidation loan is typically a large loan with a relatively lower interest rate than your existing loans and used to pay off existing loans so that you’re left with just one loan to take care of later. The idea is to save on interest and to make loan repayment a lot easier for you.

There are many ways to consolidate debt. The first step is to determine which of the different types of debt consolidation loans to use by assessing which will be most beneficial for you. You may choose from the following:

Using a Balance Transfer Credit Card

If you have a small amount of debt and you think you can pay everything off in a year, moving all of your debt on one credit card may be a good idea. The downside is you usually need an impeccable credit score to qualify for this.

Getting a Secured Loan

If you’re a homeowner or a car owner, you can use your property to borrow money with a lower interest rate. Qualifying for a secured loan for debt consolidation have a varying degree of success and largely depend on how valuable the property you are willing to use as collateral is.

Using Debt Relief

If you’ve exhausted other means of debt consolidation, you may want to look in using debt relief. A debt company will negotiate with your creditors to lower your monthly repayments and APR or negotiate other terms on your behalf. The downside is that this usually comes with a lot of restrictions as well as other requirements that you must comply with.

Applying for a Personal Loan

If you need to pay off huge debts and is willing to take several years to pay off your debts, applying for a personal loan may work for you. With a personal loan, you will borrow a large amount of money to pay off your existing debts and in turn, you’ll end up with a single debt to pay off per month based on the terms you’ve agreed to. A personal loan usually requires that you have a stable income and relatively good credit rating to qualify.

Home Equity Loan for Debt Consolidation

If you’re a homeowner, you may tap into your home equity for debt consolidation. You can choose to get a second mortgage or apply for a home equity line of credit to convert your existing debts into a single lower-interest loan.

Debt consolidation is just the first step towards a debt-free life. You must work hard to identify and stop the behaviours that got you into debt for long-term financial management. Contact us if you want to know more about how you can use your home equity for debt consolidation and how to qualify for a debt consolidation loan even with bad credit.

Best Home Equity Loan Options for You

Living on a fixed income can be quite limiting. You face challenges that hamper opportunities to enjoy life, create a better life for yourself, afford unexpected huge expenses such as medical emergencies and so on. The good news is, you’re sitting on a lot of money if you own your home or have built quite a sizable home equity. This is money that you can borrow to pay for expenses that can’t be covered by your savings or fixed income. Find out more about how you can make your home equity work for you below!

What is a Home Equity Loan?

Your home equity is the value that you own in your home. It is the difference between your home’s current market value and what you still owe. If your home is currently worth $700,000 and you still owe $35,000, then you have a whopping $665,000 home equity!

Although you may not be able to sell your home equity, you can certainly build on it over time. Because it is the value that you own, you can use it as collateral to take out a home equity loan such as a second mortgage or a home equity line of credit.

A home equity loan is a type of loan that uses the equity you’ve built up in your home as collateral. Because it is a secured loan, borrowers often enjoy lower interest rates and larger loan limits as compared to unsecured loans. Depending on the lender and the home equity loan option you choose, you may also enjoy flexible payment schemes.

What is a Second Mortgage?

A second mortgage is a home equity loan that you take on top of a primary mortgage. It comes with a set schedule of payment as well as penalties for inability to pay on time. Note that a second mortgage does not erase or nullify a primary mortgage but is another mortgage that you have to pay off. It can be better than other types of loans because the requirements are often lenient towards people with bad credit or those with low income. The money you borrow will be released as a lump sum which makes this type of home equity loan perfect for a one-time big expense such as funding a home renovation.

What is a HELOC?

A home equity line of credit gives you a line of credit with a set limit from which you can borrow as much or as little as you need. It also allows you to reborrow the money if you pay it back. Unlike a second mortgage, a HELOC often requires a reliable income and relatively good credit. A HELOC is best for recurrent significant expenses such as paying for college tuition or hospital treatments.

The best type of home equity loan for you largely depends on your financial needs and your means to pay. If you’re undecided whether to apply for a second mortgage or apply for a HELOC, contact us and we’ll be glad to discuss how to best use your home equity.

Thinking About Debt Consolidation? Here Are Your Best and Worst Options

Debt consolidation is one of the best financial solutions for people who have a lot of debt and have issues with debt payment. It is a means to manage paying debt and saving some money on interest. There is no doubt that converting several small loans from different creditors into a single loan is much less stressful and more straightforward; however, not all debt consolidation options are the same.

Some debt consolidation methods have longer repayment terms that mean you end up paying more in interest over time. Some have very flexible terms that may tempt the borrower to put off repaying until debt becomes an issue again. So, what are the best debt consolidation methods and what are their pros and cons? Financial experts CFO and co-founder of Money Coaches Canada Sheila Walkington and head of Credit Counselling Society in B.C. Scott Hannah talked about them in an interview with Global News.

Term Loans

Personal loans or term loans have a near-future end date, generally predictable yet mandatory monthly payments, and often fixed interest rate, making them the easiest debt consolidation method to manage for those who can qualify for it. However, because their repayment scheme is often shorter than a HELOC or some other types of loans, the monthly payments are significantly higher and may not be the best option for someone who is financially struggling. There is no prepayment penalty, though, so if you’re expecting a windfall in the near future, this debt consolidation option may work out for you.

Unsecured Lines of Credit

Unsecured lines of credit come with relatively low interest rates these days, with some charging just 5% to 8% interest. They also come with flexible payment terms, in which you can pay as much as you want or as low as just the interest per month, enabling you to adjust payments with your cash flow. The downside is that the flexible terms can put you deeper in debt if you don’t watch yourself closely enough.

HELOCs or Secured Lines of Credit

A HELOC is one of the debt consolidation methods with the lowest interest rates, with some lenders charging as low as 4.5%. Your home equity is used as collateral for your credit limit so it can help you pay bid debts. Because it is secured by your home, the obvious downside is you risk losing your home if you are unable to pay but if your credit score is not as desirable as what banks require, a HELOC may be a great debt consolidation option for you.

Mortgage Refinancing

Consolidating your high-interest debts into a mortgage may allow you to save a lot on interest because mortgage interest rates can go as low as 3.39% according to Ratehub.ca. Monthly payments are generally low and interest rate is fixed so you won’t have surprises down the road; however, the payment terms are generally longer and you’ll have to pay a pre-payment penalty fee should you be able to pay it off earlier than agreed.

Second Mortgage

A second mortgage for debt consolidation means taking a new home loan on a house that is already mortgaged. Because the lender faces more risks with this type of home loan, the interest rate is generally higher with a second mortgage; however, it is still a smart debt consolidation method because you will still end up saving a lot of money on interest as compared to having a few high-interest debts. After all, one loan is a lot easier to manage than dealing with multiple bills per month.

Need help with debt consolidation? Contact us today! We’ll make it possible to use your home equity for debt consolidation. Let us tell you how.