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How to rebuild your credit by consolidating your debt

Running into financial difficulty is not an uncommon problem—not by a long shot. Unexpected events such as losing a parent or being right-sized out of a job can put our finances under a lot of pressure, not to mention the strain it puts on our well-being. It’s important to keep things in perspective when difficulties arise, however, and there are many ways to manage debt. Knowing what options you have is the key to finding your way back to where you want to be financially—and emotionally.

Let’s look at Sally—a real Home Trust customer (but not her real name). She was dealing with a very difficult life event and needed help to get financially back on track.

Sally has owned her own house for 14 years, in a nice neighbourhood and with plenty of curb appeal. She’s had steady employment for over 25 years and she’s never had a problem managing her budget or paying her bills.

But then, life happened. Sally’s mother fell ill, and she had to take time off work to care for her. Weeks turned into months, and before she knew it, Sally was struggling to keep her head above water. And when her mother passed away and Sally paid the funeral expenses, her debt load shot up. Her bank wasn’t willing to loan her any more money to consolidate her debt to get back on track, and her credit rating had taken such a hit that she wasn’t able to negotiate new terms for her mortgage. Through no fault of her own, Sally found herself in real financial difficulty.

That’s when Sally turned to her mortgage broker. After looking at her credit rating, employment history, property value and current income, it was clear there was more to her story. Sally was presented with three options, and she chose the one that worked best for her, giving her the flexibility to access a revolving line of credit while also getting her debt under control and rebuilding her credit.

It was clearly the right choice. This option meant that Sally would stay in her home, she could consolidate her debt, and she got back on the long-term path she had been on when her mother fell ill.

So, what is debt consolidation, anyway, and how can it help rebuild your credit? We look at it in two phases: the short- and the long-term.

Short-term goal: consolidating your debt

If debt starts mounting to a level where it’s difficult to cope, the very first thing to look at is lowering your monthly payments. In some cases that can mean things like renegotiating a loan or changing the payment terms for a mortgage. But more often than not it means consolidating debt.

Debt consolidation involves transferring debts from multiple sources (such as loans or credit cards) into a single one. In many cases, that can result in a lower monthly payment. That’s because different debts usually involve different rates of interest, and by transferring balances from higher-interest debts into the single financial product that charges you the lowest interest, you’ve given yourself some extra breathing room. On top of that, having just one payment every month will make it easier for you to keep track of your finances and match your expenses with your income. Life just got a little bit simpler.

Long-term strategy: building your credit

While minimizing your monthly payment is the first step in getting a handle on debt, building up your credit score is your ultimate destination. A good credit score is the key to financial flexibility, lower borrowing costs, and a sound financial future.

A good credit score can be quickly damaged by a temporary inability to pay your bills—which can easily happen when life throws you a curveball. And while it can be hard to build that history back up, it’s not as hard as people often imagine. There are many creative financial products available that can help you both manage your budget and establish your reliability as a borrower.

The Home Trust Equityline Visa card, for example, gets the equity in your home working for you even when you have bruised credit. The card – which is secured against your property—lets you borrow an additional $10,000 to $100,000* against that equity so that you can consolidate non-mortgage debts into a single payment. On top of that, it even pays you 1% Cash Back on every regular purchase you make. Best of all, with every payment you make you are able to steadily repair your credit history and establish your reliability as a borrower.

Perspective is everything

Debt is a useful instrument for achieving things we couldn’t otherwise achieve, such as buying a home. And while sometimes we can fall into too much debt, that doesn’t mean the end of the world. Home Trust specializes in helping out people who have run into borrowing trouble—through no fault of their own—and getting them back on track.

For more information on how working with a mortgage broker can help you find the right solution for your situation, visit our website.

*Terms and conditions apply.

We welcome your thoughts on this blog feature. Please email your comments to Blog@hometrust.ca

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