Happy New Year to everyone reading this post and remember that a New Year means the opportunity to a New Fresh Start! This is the time of year when we take the time not only to reflect on the year behind us but to also realize the debt we have accumulated during that year. What is the best way to consolidate your debt?

Consolidate It Yourself!

Banks often will approve a personal line of credit if you have a good credit score and a good steady income. A line of credit can be secured or unsecured. Secured means it is attached to your property in the form of a mortgage, usually a lower interest rate, and unsecured means your line of credit is based solely on your credit history, income and repayment history, usually at a higher interest rate.

Good credit usually means no problem to qualify but your income must service this line of credit and banks will consider credit limit based on your income and assuming the line of credit has been fully used. This would be your worst case scenario for debt load, according to their guidelines and policies. Bank lending policies will change from time to time but the basics of credit qualification remain unchanged.

A line of credit and an overdraft are essentially the same type of credit. They both turn your “bank card” into a “credit card” so you can spend money that you do not have.

Credit means you are spending money that you do not have!

The predetermined limit on the line of credit is based on what you qualified for and just like a regular credit card; you only need to make a minimum payment each month – Not Advised!

A credit card has a very high interest rate, the overdraft protection will have the second highest, a personal line of credit will have the third highest and a secured line of credit will have the lowest interest rate available.

The interest rate on your secured line of credit will “float” with the Prime rate, as does a variable rate mortgage, whereas the credit card interest rate is fixed at a very high interest rate and usually does not change.
One thing many people do not realize is that if you do use your line of credit to make a purchase for goods or services then the rate is lower but once you use the line of credit for a cash advance, the interest rate changes on the cash advance portion and will most definitely increase. Always read the small print of your bank agreement.

If you do not own real estate with equity then the secured line of credit is not an option for you but if it is then this is where you should carry your debts providing you do not move over your credit card debts to your line of credit only to re-use your credit cards again while having a balance on your line of credit. This means you are spending money you do not have at double the rate of consumption.

Some people will use their line of credit to piggy back their credit card debt load but then will go out and use their credit cards again. Meaning that you will have double the debt you originally had, or even more in some cases, on your credit card and now your line of credit combined. This can be a terrible thing to do as your “debt hole” will only increase in size whereas your income will not making it virtually impossible to climb out of this “debt hole”.

Always remember that credit means you are spending money that you do not have! Be responsible and spend wisely!

Advantages

• Lines of credit will usually offer the lowest interest rates available

• Their low minimum monthly payments may offer options and flexibility

• This debt can be paid off as fast or slow as you like giving you freedom

Disadvantages

• If you are not disciplined with your payments then your debt will never disappear and your debt could double at the least.

• When the Prime rate increases then your interest rate will also increase which could make it difficult to manage as the minimum payment will also change.

• This may potentially allow any financially undisciplined person to double their debt load if not used responsibly

I Would Strongly Suggest

• Use your line of credit as your credit card wherever you can to make purchases for goods and services,

• Always double your minimum monthly payment

• Keep the balance no greater than at 50% of the limit

• Try not to use your credit for cash advances

• Try to keep debt on one credit facility and not both

Please feel free to reach out to me anytime,

Michael