Being in debt can be stressful at the best of times. Once you realize your debts are beyond your comfort level, you may be tempted to take certain actions to deal with the problem. Some of these actions may actually be counterproductive to the objective of being debt-free! By taking the wrong actions, you might end up further in debt than when you started and certainly more stressed out as a result. Blair Mantin of Sands & Associates shares four mistakes to avoid when in debt with Global News.
Watch the clip below, and read on for more information:
Four common mistakes people make when they find themselves in debt:
- Taking on New Debt:
This one seems obvious: “when you find yourself in a hole, the first thing you should do is stop digging”, but many individuals try to solve a debt problem by borrowing more money, including these options:
- Consolidation loan: Requires that you pay off all of your debt in full, usually with a reduced interest rate than you are currently paying (perhaps 12% instead of 20%)
- Pitfalls: Consolidation loans are often very difficult to qualify for, and they require discipline to stop using the original cards once their balance has been consolidated.
- It can be very tempting to see the cards at ‘zero’ and start to once again put charges on them.
- Consolidation loans also don’t provide an opportunity to deal with any underlying issues, so debt problems often reoccur.
- PayDay loans: Extremely expensive financing; interest costs can be more than 500% yearly!
- Pitfall: We seldom meet clients with a single payday loan. Costs and fees of payday loans often start a vicious cycle of taking out new loans to repay old ones.
- Borrowing from friends and family:
- Pitfalls: Introduces a level of ‘emotional relationship’ that can be very difficult if this debt cannot eventually be repaid.
- Consumers must treat all creditors equally and if you borrow money from family, you can only pay them back if you’re able to pay everyone else back too.
- If you wind up needing to formally restructure your debts, it’s usually much more emotionally difficult to let down a close family member than it is to “let down” the bank.
- Taking Advice from the Wrong People:
The world of debt advice is murky, with lots of misinformation. If you owe money, you might be seeking advice from friends and family, or even taking advice directly from the person you owe money to (the bank, a collection agent or a bank-funded counsellor).
- Pitfalls: Other than Licensed Insolvency Trustees, there is no single professional that is qualified and mandated to help you analyze all of your debt options.
- Well-meaning friends and family members are likely not educated in detail on debt restructuring options.
- If you’re taking advice from a collection agent or bank, realize there is a hopeless conflict of interest here – the bank wants to get repaid and is not required to consider the personal impact on you. Always get the facts for yourself, from the right source!
- Keeping it to Yourself:
The mental and physical toll of being in debt can be severe, leading to significant impacts on a person’s life, health, and their relationships.
- Pitfalls: By keeping your debt problem to yourself, negative thoughts and depression often multiply as a person can feel like they have no options, no way out.
- It’s doubly important for couples to share financial intimacy – if one partner is facing a debt crisis and is trying to keep this to himself/herself, this can be an added burden at a very tough time.
- Realize that you are not alone! More than 120,000 people in Canada seek help from a Licensed Insolvency Trustee each year.
- Mistaking Minimum Payments for Progress:
Though the minimum payments on your debt may seem manageable, it’s important to know that you are treading water at best if all you can pay is the minimum payment each month.
- Pitfalls: Once your debts get beyond a very small amount, interest charges can accumulate quickly.
- Check your credit card statement to see exactly how long it could take you to pay off your debts if you make the minimum payments only – even a $6,000 debt can take 40+ years to pay off.
- A recent client met with Sands & Associates when she was paying $200 per month on one of her credit cards. When we looked at the statement, we saw that $185 of that payment was going straight to interest and fees. More than 90% of her payments each month were not actually reducing the debt!
If you find yourself in debt, carefully evaluate the situation before you take actions that might impact you negatively. The world of debt restructuring in full of minefields – working with a professional like a Licensed Insolvency Trustee will help you get back on track, avoiding painful mistakes along the way.
Book your confidential, free debt consultation with a BC Licensed Insolvency Trustee today.