5 Solutions to Get Rid of Debts Without Affecting your Credit
Have you ever looked at your credit card balance wondering what went wrong? Thinking that these escapades might not be worth the headache you are stuck with at this point. Now comes the time to pay for those frivolities, yet you have no clue where to start.
Sure, some may recommend declaring bankruptcy… After all, why would you repay a debt when you can simply have it voided off? While we won’t go through all the reasons why you should avoid bankruptcy at all costs, you must know that beside destroying your credit score for a minimum of 5 to 14 years (and therefore losing the ability to get a credit card, buy a house or even receive student loans), you could have trouble finding a job, purchasing insurance or even starting your business.
So what should you do?
Here are 5 solutions that will leave your credit score unspoiled while helping you build solid foundations for the future:
Student Line of Credit
As a student, you have access to an array of credit solutions among which the usually cheapest and easiest to obtain is a line of credit. Why so? Because banks and financial institutions want to attract young professionals. You could therefore use this opportunity to refund your existing debts with money borrowed at a much lower rate.
Registered Retirement Savings Plan (RRSP)
How will a retirement account help me getting rid of my debts you ask? Obviously not through retirement planning! This being said, the RRSP is a powerful tool when combined to a loan. By borrowing your contribution, you will be able to use the tax return to refund your debts. You will still need to pay back the loan, but the money invested in your RRSP will generate higher returns than the low interest rate.
Any students out there? Know that you will even have the possibility to withdraw up to 10 000$ per year (for a total of 20 000$) from your RRSP with no penalty and still receive the tax credit. The only conditions are that you leave the money in the account for at least 90 days before the withdrawal and that you put it back within 10 years.
Some types of insurance provide dividends and/or a cash surrender value and/or allow to invest tax-free within the policy. The owner of such a product could therefore sell it (yet lose some or all of its coverage) or take out a policy loan, which is guaranteed by the amounts within the policy and therefore at a lower interest rate, and use the proceeds to refund its debts.
Home Equity Line of Credit
Dear homeowners, you probably know by now that renovations are expensive. When expenses are higher than expected and end up on your credit card, you have the option to open a home equity line of credit, providing you with the same flexibility as a regular line of credit at a much lower interest rate. Moreover, if your house is (partially) rented, you will be able to deduct (some of) your interest payments at the end of the year.
This last option is without a doubt the least sensational, yet it can still help you avoiding bankruptcy and offers more options than a debt consolidation. A consolidation consists of regrouping all your debts at one institution under a lower but still high interest rate. However, with all your debts at the same rate, you lose the possibility to accelerate your payments on a specific debt (the one with the highest rate). A personal loan gives you this strategic edge: paying higher-interest loans first.
So what happens when all your debts are paid back? You will benefit from the same good savings habits you have developed while getting rid of your debts, only this time, you will be planning your wildest dreams.
Shall we begin?