Whether you want to consolidate debts or improve your credit rating, there are many credit card repayment factors to consider. The actions you take will make or break the value of your repayment efforts. And sometimes it's what you're not doing that keeps you from getting ahead. Unfortunately, there is no set standard to follow but the 24 do's and don'ts below for credit card repayment should help you.
Managing Credit Card Balances
1. DO consolidate your debts when possible
Debt consolidation loans really do work in your favour. These are "installment loans," which means the debt looks different to the credit bureaus. Unlike with credit cards (a type of revolving credit), these debts have a smaller impact on your credit score because they do not factor into your utilization rate.
Disclaimer: LendingArch.ca provides credit card debt repayment loans for Canadians for between $2,000 and $40,000 on a case-by-case basis.
2. DON'T consolidate one card with another
This strategy gets around through word-of-mouth and has little fundamental support. Consolidating debts with other cards only help in one way: it lets you control the credit utilization rates of your cards with different reporting dates. This is very important since your utilization rate is 30 percent of your FICO score calculation.
3. DO try to time your credit card payments
The reporting date of a credit card comes down to the provider, although many use your statement balance instead of the balance on a specific date. The reporting date could happen on a day other than the statement close date. Figure out when your card issuer reports and schedule your payments accordingly.
4. DON'T consolidate with new credit cards
The age of your credit is a big factor for your FICO score, amounting to 15 percent of your score's calculation. New credit cards drop the average age and cause a decrease in credit rating for the first months and year. The choice to fix your credit card debts with a debt consolidation loan is more reasonable. By introducing a new credit line through an installment loan, you are increasing your credit diversity -- which makes up 10 percent of your credit score.
5. DO accept credit limit increases
You are on the path to better credit, right? Then there is no reason to turn down an offer to increase your credit card limit. Even for cards with higher interest rates -- the fee only applies to your outstanding balance, which you have control over. But, having higher limits on your cards can push your credit score up faster as it reduces your overall credit utilization rate.
6. DON'T cancel your credit cards
It can be tempting to shift all your debt to one card and shut the rest off. This is almost definitely a huge mistake as doing so will skyrocket your credit utilization rate. The best thing to do is keep the accounts open until your total debt load is brought down to a healthy level.
Consolidating Credit Cards with High Interest
7. DO consolidate all your high-interest debt
Credit cards with higher interest rates are almost impossible to pay off. The accruing interest magnifies fast, which borrowers typically realize only after the card maxes out. Sooner than later, it would be in your best interest to obtain a debt consolidation loan to cover what you owe on your high-rate cards.
8. DON'T get just any debt consolidation loan
For sub-prime borrowers, a debt consolidation loan might not make sense -- the interest rates are higher and there are often hidden fees. Prime borrowers can do well with a debt consolidation, but every lender's product will vary. You need to observe the interest rate and actual end cost before you apply.
9. DO use collateral for affordable consolidation loans
Sometimes you have the option to put up collateral toward your consolidation loan, and you get a better interest rate in return. Secured debt consolidation loans are preferred over unsecured ones. If you have any eligible assets, this is definitely a route worth looking at further.
10. DON'T accept any limit increases
Taking a higher credit limit on a high-interest card can create a flurry of problems. The biggest comes when trying to make a large purchase, such as a house. Lenders will look at your file and see the accessible debt as a potential risk. This risk factor is even higher when the interest rates are high -- as it means the total you are liable for is also higher.
11. DO pay your high rate cards off first
Regardless of how it is done, your highest=cost credit lines should be taken care of right away. There are alternatives to a debt consolidation loan, such as a line of credit or a balance transfer from a low-interest card.
12. DON'T skip out on your other cards
Paying off all your debt is important, so do not forget about your other credit cards. The bare minimum needs to be paid each month. Still, there is one more thing to consider: if you only pay the minimum, you shouldn't be spending and extending the owing amount.
Budgeting Your Credit Card Repayments
13. DO make a full-scale monthly budget plan
You never want to skip out on the little details. If math is not your strong point, use a budgeting app. There are many options available -- such as Mint and You Need a Budget (YNAB) for individuals and FreshBooks for small business owners.
14. DON'T forget to include a safety margin
You never actually know how much your pay will be (what if you have unpaid sick days?) and there is always the risk of surprise expenses. You should add an extra 10-20 percent to your calculations before determining how much you have left for credit card repayments.
15. DO get more involved during tax season
There are many cases where you want to do the minimum when filing taxes. It is especially common for small business owners fearing a CRA audit. Still, the barrier between more credits and deductions is often a few hours of research and accounting work. Take advantage of your tax return by paying onto your smallest high-interest credit card first.
16. DON'T budget your highest debts first
Cover your high-interest cards first regardless of their outstanding balances, because these debts cost more to carry. Motivate yourself by paying the smaller balance cards because seeing a $0 balance is a great reassurance.
17. DO build a small savings fund on the side
Your monthly budget will include what you pay on your credit cards, but does it mention what you add to the balance? Most Canadians continue to use their credit cards even while trying to pay off the balance in full. This can trigger bad borrowing behaviour, but by having cash savings, you can avoid re-entering that mentality.
18. DON'T acquire a variable rate credit card
How much worse would your budgeting plan be with $50 less to work with each month? The impact of the Bank of Canada lifting interest rates is significant. With rates already lower than years before, it is best not to gamble on these things. Stick with debts you can budget smoothly on a month-to-month basis.
Consolidating Credit Card Debts with Online Loans
19. DO target a low-rate debt consolidation loan
There are two main types of debt consolidation loan providers -- lenders that accommodate sub-prime borrowers and lenders that don't. The latter is where the true value is, and sub-prime debt consolidation usually comes at a high cost.
LendingArch.ca's debt consolidation loans have lower rates than credit cards!
20. DON'T trust every single lender out there
With so many online lenders available, it can be difficult which to choose. You might get the idea that they are all trustable -- but problems exist, even with some of the biggest lenders around. Do your research and determine if there are any insightful instances of major user complaints, negative BBB reviews or social media comments.
21. DO pay extra attention for hidden fees
It can be easy for an online lender to have tricky wording, with parts of the story available on different pages. You have to be careful when borrowing, as any extra costs will take away from what you can afford each month. Typically, a good lender will only charge interest and an origination fee, which goes on top of the loan principal.
22. DON'T assume no origination fee is a good thing
A debt consolidation loan with no origination fee sounds great in theory. Say it costs 3.75 percent for a loan with a fee, or nothing with a different loan. The difference in the borrowing cost still comes down to the interest rate. So, make sure to calculate this difference and discover whether saving on the origination fee is worth taking a higher interest rate.
23. DO compare online debt consolidation loan offers
You should always shop around before concluding which lender is right for your borrowing needs. Plenty of debt consolidation loan offers exist for borrowers in Canada. The cost difference, fees and eligibility requirements will always vary, so do your homework before deciding where to apply.
24. DON'T go on a loan application spree
Your FICO score will see a substantial drop by applying for many loans at once – especially in the first six months. For any new purchase, you might receive a higher interest rate, which can be quite costly on an auto or home loan.