The Power of Consolidating Debt

Even if you never read a newspaper, listen to the radio or watch TV you can tell by your grocery bills and your credit card statement that the economy is in a downturn. Rising prices and rising rates across the board all mean your cash flow is squeezed. And it sounds like it may get worse before it gets better. It is time for Canadians to tighten their belts. One of the most painless ways to do just that is to consolidate higher rate credit cards and loans into lower rate products, like consolidation loans and lines of credit.

How does interest work?
Whenever you borrow money or use your credit card the lender makes their money on the interest you pay. Interest rates are determined by a number of factors like the economy, the borrowers risk profile and the type of product. Secured debt, such as a mortgage or car loan, typically has lower rates because the loan is secured by your home or car. If you don’t pay your loan as agreed in your contract, the lender has the right to seize your property and sell it to get their money back. Credit cards and personal unsecured loan rates are usually higher. But in both cases interest is calculated simply by multiplying the rate by your balance. The higher the interest rate the more you pay in interest. And of course, the higher the balance the more you pay.

When you get a personal loan at a financial institution a rate is applied to your balance and part of your payment covers the interest due and the rest goes to pay down the principal of the loan. Each payment is structured that way. So at the beginning of your loan, your bi-weekly or monthly payment covers mostly interest. As you pay down the principal, more of your payment goes to reducing your balance and less to interest. Typically, your financial institution will work out a schedule so that your loan is paid off in a specific period of time.

Credit cards are a different kettle of fish. Interest is calculated in the same way, but payments are structured differently. The amount you pay each month is calculated as a minimum percentage of your balance due. If you pay only the minimum balance you are likely not even covering your interest payment, and guess what, any interest amount still owing is added to your balance and next month you are paying interest on interest. Not so nifty. Now you know why so many advertising dollars are poured into those expensive TV and print ads.

What do you do?
If you have outstanding credit card balances and you are not paying them off each month it is time to restructure your debt. Talk to your financial advisor about getting a consolidation loan. This is a loan that adds up all of your outstanding debt and puts it all in one loan and the proceeds of the loan are used to pay off your credit card balances. The consolidation loan will have a lower rate of interest than any high rate credit cards. What does a lower rate mean to you? As you now know lower rates mean paying less interest, but it can also mean the amount of your payment each month will be lower. You can elect to keep the payment amounts the same and get out of debt faster, or loosen up your cash flow or start that savings plan you keep thinking about. You can also try calling your credit card providers and ask them to lower your rate.

The Credit Union Loan Rates vs. Credit Card Rates*

*rates subject to change

How to get started?
Gather up all of your recent credit card statements, loan documents and bank statements and come in to your nearest branch or call Member Assistance. We would love to set–up an appointment to help you figure out how to save money on your interest payments. Even if a consolidation loan is not the right answer for you, there are other ways we can help you get into the best possible financial health right now.

What don’t you do?
Whether you pay off your balances on your own or get a consolidation loan, once your credit cards and higher rate loans are paid off the worst possible thing to do is to start using your credit cards again. Cut them up, lock them away – whatever you have to do. Keep the lowest rate card for emergencies. Only use your cards if you are able to pay off the balance when the bill comes in.

Anything else?
Consolidating your debt to pay lower interest is not the only thing that you need to do. In a recent survey less than 30% of members indicated they followed a financial plan. The largest group of respondents indicated they pay their bills and live on the rest. In fact you need a financial check up and plan more than ever. It’s time to make a plan that gives you the financial health to weather any ups and downs.