Almost all Canadians will take on some form of debt in their lives, and as an Albertan, you're likely carrying more than our neighbours to the east and north (to the west, that's another story). According to TransUnion, our province has the second-highest average consumer debt (all debt excluding mortgage) in Canada, trailing only BC. The average Albertan owes $33,613 in credit cards, lines of credit, student loans, and other personal loans—a number that has increased significantly in the past decade.
If you're like most Albertans, you're probably borrowing from a few different companies—like a credit card company (or two), car loan provider, and bank. These lenders are likely charging you different interest rates, and depending on your type of debt, these rates can be well into the double digits. Your situation may seem desperate, but don't despair: debt consolidation may help you get back on track. What is debt consolidation?
Debt consolidation involves borrowing money from one lower-interest lender to pay off your debts with other higher-interest lenders. By doing this, you will clear up those higher-interest debts and be left with one, easy-to-track, lower-interest loan.
Getting another loan may sound like the last thing you want to do, but there are two really good reasons to consolidate your debts:
Pay less interest and get out of debt faster.
We've all heard the stats, and they go something like this: if you carry $10,000 in credit card debt with an 18.5% interest rate and you pay only the minimum (let's say $200 per month), only $46 of your payment is actually paying down your credit card—the other $154 is going towards interest. If you keep up those payments, you'll end up paying $9261 in interest over eight years—and that's assuming you don't put another dollar on that card.
With debt consolidation, you could take out a $10,000 loan with a 5.5% interest rate and use that loan to completely pay off your credit card. Sticking with your $200 payments, you could be debt-free in less than five years, paying only $1384 in total interest.
Do your own credit card math with this calculator courtesy of the Financial Consumer Agency of Canada
Simplify your payments and planning.
If you've built up debt with a few different lenders, it may be hard to stay on top of your payment due dates and track your progress (or lack thereof). By consolidating your debts, you'll have only one loan to pay and one number to track, making it easier to create a realistic repayment plan.
But it's not an easy fix.
Before you consolidate your debts, you should have a clear understanding of your spending patterns. Mint.com¹ is a free site (and mobile app) that syncs with your online banking to help you monitor your spending and build a budget.
Speaking of budgets, you should also have a strategy for covering your expenses without resorting to credit cards or high-interest loans. A lower-interest loan may help you pay off your credit cards, but if you rack up that credit card debt again, you'll be back where you started—and with an extra loan to worry about.
Debt consolidation is a tool, not a solution. Use it wisely and you could save thousands in interest and years of stress. Want help getting started? Follow these 6 debt consolidating steps or drop by your local branch to talk to a personal banking specialist. They can help you assess your current situation and improve it financially.
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