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What to do when you’ve consolidated credit and it didn’t work 

When you’ve consolidated credit in an effort to get out of debt, only to end up deep in debt again, it can be frustrating.

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Q: About a year ago, when I was having trouble making my loan and credit card payments, my bank suggested I get a consolidation loan. I took the loan because the interest rate was lower than what I was paying, so overall, my payments went down. I was doing OK and getting myself back on track financially, but I’m back in debt again and this time, I’ve still got the consolidation loan to pay too. I feel worse off than before I consolidated my credit, what should I do? ~Sean 

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A: A debt consolidation loan is typically one of the first options many people use when they want to get their finances back on track. However, consolidation loans have two key pitfalls that need to be addressed before your loan can help you achieve your goals. If you don’t deal with the underlying cause of your debt problem first, and then establish and live according to a realistic budget, your loan will almost certainly fail. But all hope is not lost if this is what happened to you.  

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A loan from your bank or credit union to consolidate debt payments is only one option; there are other debt consolidation tools that many Canadians simply aren’t aware of. So for anyone who has consolidated credit in the past and finds themselves in debt again, here are tips to help you improve your situation. 

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Identify why you’re in debt 

It’s important to pinpoint why you’re in debt again. Without knowing what went wrong it’s pretty hard to decide what you need to do differently to resolve your situation.  

Maybe the original loan payment was too high for your budget, or maybe you didn’t even have a budget. If there’s a spending problem in your household, or you’re living with reduced income, an illness or injury in the family, unexpected expenses, or you’re just trying to get by with the high cost of living, these are all valid reasons why you might be in over your head again. 

3 Things Debt Consolidation Can’t Fix 

Create a new budget outline 

Ask yourself when the last time was that you tracked your spending and then created an outline of what your expenses are, when to pay your bills, and where your savings account stands in relation to your goals. If this sounds foreign to you it’s time to do a deep dive into how you manage your money.  

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Get a notebook or use a tracking app, but start by figuring out where your money is actually going, not where you think it’s going. Then use a budget template to start creating a realistic household budget based on your current situation. An interactive, downloadable spreadsheet might help, or a web-based budgeting app.  

As you start putting together your budget outline, pay special attention to expenses that don’t occur on a regular basis. Seasonal, annual, and periodic expenses require us to save up what we need so that when they do occur, we’ve got the money — not credit — available to pay for them.  

What to do if you don’t know how to budget 

If figuring out why you’re in the position you’re in and outlining a budget sound terrifying, reach out to a non-profit credit counselling organization. The credit counsellors who work at organizations like ours are experts at helping people budget their money. They can spot gaps in your outline and help you identify costly habits. They can review your credit obligations and make recommendations about how you can handle your situation better based on your goals and unique circumstances.  

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If you have questions about your credit, debt, or money, they’d be happy to answer those for you. And if they think you would be better served by someone else, they will point you in the direction to get what you need. At the end of the day it’s about your financial well-being and what you want to do to regain stability, so don’t be afraid to reach out to experts for help when you need it. 

Tips to deal with debt, round two 

When you’re in debt after you’ve consolidated credit once before, you need to choose your next option carefully. A second consolidation loan, for instance, is often possible, but the interest rate will be higher and it will reflect more negatively on your credit rating than the first loan did. This could affect other goals you may have. It may be worth considering alternative debt and payment consolidation options this time around. 

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Armed with your updated budget and some insight into why you’re in debt again, determine what else you can do to improve your bottom line. Consider: 

1. What can you do to prioritize debt payment and stop yourself from spending impulsively? 

2. Do you need help recovering from an injury or illness? 

3. Are you getting all the money you can from possible income sources? This includes checking paystubs for accuracy, submitting health receipts for reimbursement if you have extended coverage, and filing your income taxes to get any refund and rebates you qualify for. If you’ve lent a friend money, ask them about repayment. If you’re due spousal or child support from a former partner, take steps to get what you’re owed. Have you increased your working hours or taken on a second job to earn as much money as you can? 

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4. Is there an addiction or dependency getting in the way of managing your money properly? If there is, consider seeking professional help for that first. 

5. Have you talked to others in your household about increasing their income or what they pay for? This might mean a partner generating some extra income or a teenager using their part-time income to offset some reasonable expenses that they need to take responsibility for (e.g. personal care or their cellphone bill). 

6. Where can you reduce your expenses? Some choices will be harder to make than others (e.g. moving to a less expensive home), but it doesn’t have to be forever.  

The bottom line on dealing with debt when a consolidation loan doesn’t work 

There’s never a one-size-fits-all solution for debt problems. Before you make any drastic choices or changes, get help to find out about all of the different debt relief options that apply to your situation. Some are more drastic than others and all come with implications to your financial recovery. While the going might be a bit rough right now, do your best to see it through. What you learn will help you avoid debt, round three. 

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Related reading: 

Top 5 Solutions When You’re Declined for a Debt Consolidation Loan 

What Would a Financial “Throwback” Reveal About Your Credit Cards? 

5 Things to Do After Getting a Pay Raise 

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email, check nomoredebts.org or call 1-888-527-8999.  

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