Tempted to use a quick fix on your debt? Here are 3 misconceptions

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A lot of people turn to what they believe will be a quick fix when attempting to improve their credit, but when it has taken months or years to get to the point they’re at, it will take months or years to get back on track.

A so-called quick fix can even prolong the time it takes and cause more trouble. All that glitters isn’t gold when it comes to quick fixes for our money. Here are three common misconceptions I hear as a credit counsellor and what you really need to know.

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Closing my credit cards will lower my credit rating

Anything you do with your credit will affect your credit score, so it’s crucial not to consider one action in isolation. If you close an old credit card that you hardly ever use at a zero balance, there’s every chance your score will temporarily go down because you’ve closed a long-standing account.

Less available credit by closing the account can also change your credit utilization ratio if you have other credit cards with balances owing. The higher your ratio, the lower your score, so try to keep balances on revolving forms of credit below about 60 per cent of your available credit limits.

However, closing accounts you don’t use will help avoid temptation spending and can protect you from fraud on an account you don’t keep a close eye on. Less available credit also bodes well for a new credit application, such as a car loan or mortgage.

There is only so much credit lenders can provide, so focus on paying your bills in full and on time, using a realistic budget to spend and save within your means, and only applying for credit you truly need. Your score will then take care of itself.

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Paying for credit repair is better than DIY

Let’s be clear: there’s no quick or easy way to wipe negative information off your credit report if it is accurate. It doesn’t matter how much you pay a debt consultant or anyone who claims they can do it for you. With a few exceptions, everything good or bad will clear off your credit report in six to seven years. That means waiting it out and replacing negative with positive information is your best strategy, and one that you can do yourself for free.

Start by getting free copies of your own credit reports to check for accuracy and completeness. Then outline a budget to pay your bills on time. Set up automatic payments or calendar reminders so that you don’t forget.

Work to bring down what you owe and avoid applying for new credit while you do. Establish a good money management system for your household and be patient. This will take time, but there’s no shortcut that won’t cost you more in the long run.

Consolidating will hurt my credit

There are many different types of consolidation and by the time you start thinking about debt consolidation options, your credit has likely already taken a hit. A few late or missed payments, a cellphone bill that hasn’t been paid in full for a few months, or a line of credit where the balance increases from month to month despite making payments are all issues that adversely impact your credit rating, and they are symptoms of a bigger problem.

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The longer you wait to deal with a debt problem, the worse it can get, so taking action to consolidate your debts will improve your credit. But the devil is in the details. It’s important to choose the right consolidation option for your situation, future goals and the way you deal with your money. Start with the least drastic option and work your way up.

For example, talk to the lender at your bank or credit union to see if you qualify for a consolidation loan at a reasonable interest rate. If you do, make sure you understand the terms and conditions, and ensure you have a budget you can follow while you pay off the loan.

If borrowing more money to pay off what you already owe seems counterproductive, explore a debt management program at a non-profit credit counselling agency. These repayment programs consolidate your payments and lower or eliminate ongoing interest charges, which makes it easier to pay off what you owe without going deeper into debt.

There are also settlement options for those who have funds available to do that — for example, from the sale of a home or through family help. However, with a debt settlement, a portion of the debt is written off, which can impact your credit rating for longer than if you pay off what you owe.

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Similarly, there are legal options, such as a consumer proposal and bankruptcy. These come with their own requirements and can have long-term consequences for your credit and overall well-being.

If you’re struggling to figure out which way to turn, get help from a reputable organization that will explain all your options so that you can make an informed decision and regain financial stability.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 27 years.

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