Stressed out about your debt? You’re not alone – high debt levels are becoming an unsustainable issue for more than a third of Canadians; a recent survey from Manulife finds respondents are increasingly covering daily costs by turning to credit cards, borrowing from family, and selling off assets.
What’s most alarming is the type of debt we’re relying on; the high-interest, high-risk variety that not only racks up big payments, but dings your credit score as well.
The good news: by managing your existing debt wisely, you can mitigate the damage to your score and set yourself on the path to debt payoff. Here’s a look at your options.
Also read: How I Ruined My Credit Score>
Target Your Revolving Debt
Revolving debt is the most common type of credit available: it’s an open-ended loan that never needs to be paid off in full in exchange for regular minimum payments and high interest charges – think credit cards, lines of credit, and HELOCs. They’re also the easiest form of debt to abuse; with no payoff date in sight, balances and interest charges can pile up beyond a borrower’s control.
Using revolving debt responsibly is great for your credit score, but carrying a too-high balance or having too many revolving accounts open paints you as a high-risk borrower to your credit bureau.
Also read: How to Read Your Bureau Report>
Move It Around
One of the most common ways to combat excessive revolving debt is to move it to a loan with installments and a set term. The impact on your credit report will be two-fold:
- The high-risk account will appear to have been paid off
- Your score will benefit from the regular payoff of an installment loan
By amortizing your debt with a deadline and scheduled payments, you minimize the risk it presents and you’ll improve your profile as a responsible borrower. “The more you’re able to demonstrate the ability to handle debt, and pay down debt, that’s very positive from a credit score perspective,” says Andrew Graham, co-founder and CEO of Borrowell, an online term loan provider.
Your Current Score Determines Your Options
When it comes to debt management, it’s best to catch it early; the higher your existing credit score, the more loan options you’ll have. Borrowell’s services, which provide three- and five-year term loans at interest rates starting at 5.6 per cent APR, are available to those with a minimum credit score of 660.
“These are designed for people with good credit. They’re just carrying too much of it,” says Graham. “We know there’s about $82 billion dollars of credit card debt in Canada, and much of that is held at rates of 20 per cent interest and above. And many people who are carrying that really don’t deserve to be paying that much interest.”
Reviving a Low Score
If your score is already too bruised to qualify for a term loan, don’t worry – there are still ways to manage your debt. Your first step is to reach out to a credit counselling professional to chat about your options.
“There are lenders out there who serve different parts of the market. People like credit counsellors, especially not for profit ones, who work with people facing financial challenges like bankruptcies and so forth, can be excellent,” says Graham.
Debt consolidation programs, such as those offered by Credit Canada Debt Solutions, will connect you with a credit professional, negotiate with your creditors on your behalf, and will establish a dedicated debt repayment plan based on your specific credit needs.
However, consumers should beware predatory debt settlement programs; these programs will often claim to be legitimate, force borrowers to sign misleading contracts, and then leave them hanging after collecting an initial fee. In 2013, the Ontario government banned many of the practices used by these companies. Visit the Ontario Association of Credit Counselling Services for more info.
Ditch the Stigma
Taking the necessary steps to control your debt is no easy feat – but it’s one your should be proud of. “Traditionally, people think of going online to get loans, and think of consolidation loans, as being for people who are desperate and maybe don’t have a lot of options,” says Graham.
“We’re trying to change the perception – we say it’s a lot like online dating was 10 years ago.
“What we’re trying to say is, this is actually a much easier and better way to borrow than many, many other options. People should be proud of working with a company like ours, as a really smart way to pay down debt and pay less on interest.”