Debt Consolidation using your Credit Cards

Debt Consolidation using your Credit Cards

The average Canadian household has credit card balances in excess of $8,000 and is paying interest rates of 19.99% or more, which translates to $1,600 per year in interest alone. If you have debt from multiple credit cards, you can consolidate debt into one or a few credit cards to reduce the number of monthly bills to pay

Advantages
  • You can take advantage of low-interest rates after consolidation as well as low promotional interest rates from time to time.
  • With a single credit card debt, you can easily and conveniently track what you owe and you will not risk failing to, or forgetting to make monthly repayments.
  • You are not restricted on how much you can pay at the end of the month. You can pay the minimum when things are not going well (such as in case of an emergency) and as much as you can afford when you have cash (you will save on interest if you finish repaying quickly).
Disadvantages
  • Most people who need to consolidate their loans already have financial issues, meaning they don’t qualify for % balance transfer credit card in the first place. Lenders give the best balance transfer deals to those with high credit scores and clean credit history.
  • Low promotional interest rates usually only last for a few months, the duration within which you might not have cleared your now consolidated credit card debt.
  • After the end of the promotional rate, normal interest rates apply. These are usually very high in Canada and can eat into your monthly disposable income.
  • If you are not disciplined, the fact that minimum monthly repayments are low means there is no pressure and it might, therefore, take you decades to pay off the debt.

Talk to a credit counselor to help you determine the debt consolidation method that best works for you. However, note that not all credit counselors have your best interest at heart, even non-profit counselors. Some of the things to consider when searching for a reputable non-profit credit counselling organization include a willingness to send free information without asking you to share details of your situation, licensing to offer the services, and whether other services are offered (such as savings debt management classes).

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Debt Consolidation using Credit Cards

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To determine if credit card consolidation is the right option, there are several things to consider:

  • From your credit card statements, how much credit card debt do you have?
  • How much can you realistically afford to pay for your credit card debt at the end of each month?
  • What is the duration of the introductory low-APR window or the low promotional interest rate?

Debt consolidation using a credit card is a good option if you cannot find a lender to give you a debt consolidation loan. Once you have a single credit card, you could then beat the banking sector in its own game by going for a 0% balance transfer credit card. This allows you to transfer your store card and high-interest rate credit card to a balance transfer credit card that attracts a low interest rate of between 0% and 2.99%. With most lenders, the interest-free grace period is usually spread between 12 and 40 months.

When you do credit card balance transfer from one provider to the next, the new provider will charge a fee for this service. This is usually a percentage of the amount you want to transfer. This transfer fee is between 2% and 5% with most lenders.

Not paying interest on your credit card debt means you will clear the debt sooner. Note that even when the grace period ends, you will have paid off a substantial portion of the debt and you will be able to pay the rest more comfortably.

The law only obliges lenders to give 51% of applicants their advertised promotional. If the lender decides they do not want many applicants, you may still fail to get the low promotional interest rate.

Note that with some lenders, the low introductory APR might only apply to balance transfers. This means if you make a new purchase, you may be charged the standard APR, which is usually very high. This is, therefore, a good option if your sole aim is debt consolidation (and not getting a new credit card debt).

Lenders offer low promotional interest rates from time to time to encourage defaulters to pay off their credit card debts. Take advantage of these low promotional interest rates to do the consolidation.

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