FP Responses: Should interest rates rise, should we consolidate our debt? – financial mail | Eurica Project

Here are a few tips to reduce credit card debt

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In an increasingly complex world, the Financial Post should be the first place you look for answers. Our FP Answers initiative puts readers in the driver’s seat: you ask questions and our reporters find answers not just for you, but for all of our readers. Today we’re answering a question from Sheila about investing.

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By Julie Cazzin starring Janet Gray

Q: A friend got into credit card debt. Should he consolidate debt as interest rates rise? Is there an impact on creditworthiness? What are some tips to reduce that debt? — Thank you Sheila H

FP responses: Sheila, that’s a great question and very timely as the Bank of Canada is raising interest rates. Most credit cards have extremely high interest rates – often more than 20 percent – and it’s worth looking into alternatives to reduce those rates. I have a few tips to help you reduce that debt.

You can start by making sure you always make the minimum payments. It may not drain your balance significantly at this point, but it will keep you in good standing with your credit cardholders and the credit bureaus. You should respect these relationships because they can be helpful when you need them.

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You should also contact your credit card holder by phone or email and ask for a lower interest rate. Switching to a low-fee card may be necessary, but this reduces high interest costs. Now is not the time to worry about your airline points or cashback rewards. Get a basic no-perks card with a lower interest rate. When you make your payment, more is credited toward the principal balance, which in turn reduces your debt faster.

It’s always worth taking a close look at how much you’re spending on your card. Ask yourself: are all items needs or buy at your own discretion want that can be reduced or eliminated to settle the balance faster? Spending on lunch, coffee, gym memberships, electronics, nail appointments and haircuts, takeout, etc. can add up quickly.

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It’s also worth setting up automatic payments near paydays. Be sure to cut back on your spending at the same time so you don’t have to rely on using credit cards. Going forward, use as much cash and debit cards as possible to keep your outstanding debt under control.

Consolidating your debt is often a good option to get a lower interest rate and a fixed repayment schedule. Debt consolidation combines several of your debts, usually high-interest debt like credit card bills, into a single payment. You can consolidate your debt by transferring it to a lower-rate card or to a fixed-rate loan from a bank or line of credit. Of course, qualifying for some of these options depends on your credit rating and income level. But your first step should always be to speak to your lenders for help.

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A remortgage often makes sense when your monthly debt payments are less than 50 percent of your gross monthly income, your credit rating is good enough to qualify for a low-interest credit card or consumer loan, and a consolidation loan allows you to pay off the balance within five years.

Consolidation is also useful when you want to simplify your payment so you don’t miss a monthly payment by the due date and when you want to set a deadline to bring your account balance to zero. Installment loans have a fixed number of installments and result in a zero balance on a final payment. These are helpful options to keep you on track to fully pay off your debt.

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If you’ve checked with your bank or credit card company about consolidation options and aren’t happy with the options, contact a trusted and accredited credit counselor from a nonprofit agency to review the alternatives available to you. Find out in advance what costs (if any) you will incur. You can find a good credit advisor at Credit Canada, as well as the Canadian government’s “Help from a Credit Advisor” section of the Financial Consumer Agency of Canada.

Finally, your credit score may initially show a slight decline as you acquire new products, which may require some detailed inquiries into your credit score. However, if you stick to the debt repayment plan, you will find that your credit score improves.

Be patient as this can take time, often 24 to 48 months. But if you stick to a solid repayment schedule and don’t incur any more debt, you’ll steadily lower your debt and eventually be debt-free.

Janet Gray is a Counseling Only Certified Financial Planner at Money Coaches Canada in Ottawa.

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