With over 75 million credit cards in circulation across the country, it’s clear that the average Canadian is enjoying the convenience of credit card use – unfortunately that convenience can come at a big cost.
Vancouver-based Licensed Insolvency Trustee and Vice-President of Sands & Associates Blair Mantin meets with people seeking debt help every day and says that credit card debts are one of the most common types of problematic debt consumers have. He says many people struggle for years trying to get out from under credit card debt before reaching out for help.
If you’re working towards a zero-balance on your credit cards, watch out for these three common problems that can impede your progress and make your debt-free goals difficult to meet – and learn what you can do about them.
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Common Challenges People Face When Paying Off Credit Cards
Paying Only (or Close to) the Minimum Payment
Only paying the minimum required payment, or just slightly more each month means that even a reasonably low credit card balance can take years to pay off. Because carrying a balance on your credit card means you will accrue interest charges, only a portion of your payment goes towards paying down the amount you spent – the rest goes towards interest or other fees.
The time to pay off even a relatively ‘small’ credit card debt can be shocking – a debt of just $4,100 on a credit card can take 25 years and 9 months to pay off if only the minimum payments are made each month.
- Check your monthly credit card statement to see a breakdown of how long it will take you to pay off your credit card balance if you only pay the minimum payments each month. You may be surprised!
- The minimum payment required to keep your credit card account up to date could be calculated a few different ways, either based on a percentage of your overall balance, or a flat rate.
- In some cases, just $10.00 of what you pay each month actually goes to reduce the balance; the remainder covers interest and finance charges that reoccur each month.
- Being unable to make much more than your minimum monthly payment may be a sign of a more serious debt problem.
Tip: Take a close look at your budget and decide how much beyond minimum payments you can afford each month. If you’re still far from being able to make meaningful payments it may be time to look into other alternatives to paying off the debt.
Carrying on Using Credit
One of the biggest setbacks people face when working towards paying off their credit card debt is continuing to use their credit cards. It’s important to avoid accumulating any new debts on your credit cards as continuing to add to your balance means you’ll be working on paying off the debt even longer, which can derail your budget and be incredibly discouraging.
- Avoid the temptation to overspend by carrying cash – many people find they are more hesitant to part with money they can physically see in their wallet.
- Don’t take cash advances on credit cards, there is no grace period and interest charges begin to accrue immediately.
- Check your credit card statement in detail each month if you find yourself using your card and try to pinpoint why and how you’re going off course.
- If you need to use your credit card, only do so for purchases you already have the cash on hand for – and pay the balance off right away.
- Take a hard look at your budget each month – are you able to meet your obligations without relying on credit, or is using credit a fact of life each month just to get by?
Tip: Continual or even temporary reliance on credit cards to bridge the gap between wages and costs of living can lead to long-term problems. Get advice from a reputable professional as soon as possible if you’re stuck in a debt-cycle.
Paying Off Debt with Credit
Using credit to make debt payments is sometimes called “financial Tetris” in reference to the often frantic moving around of money at month end to try to keep all credit accounts in good standing. The problem is that although you may be servicing interest and avoiding payments being delinquent, which protects your credit rating, you’re not truly making progress on paying off debt and are often simply delaying an inevitable cash crunch.
- Transferring a balance from one credit card to another with a lower interest rate can be advantageous – but you need to be certain of any costs of doing so and make high enough payments each month to avoid the “minimum payment trap”.
- While consolidation loans can simplify managing debt or accessing lower interest rates, you may find it difficult to qualify for a consolidation loan at a low rate (if at all) in the event your credit score has been impacted by late payments, or if you are carrying a large amount of debt without a co-signer or asset to pledge as collateral.
- If you can consolidate your debts, it’s absolutely vital that you stop using the cards that are now back at zero. We meet with people every day who had consolidated debts but found themselves continuing to use their credit cards – resulting in the problem unfortunately reoccurring and the cards once again getting maxed out.
- Don’t take out payday loans to meet other bill payments, they often start a borrowing habit that snowballs very quickly.
- Relying on a cash advance, another credit card or an overdraft to make payments on a credit card is a sure sign of a pending debt problem.
Tip: Talk to a Licensed Insolvency Trustee about whether a Consumer Proposal could be a better debt solution. Consumer Proposals allow you to consolidate without borrowing or paying interest – and you can get forgiveness for a portion of your total debts.
Many people feel embarrassed or discouraged when it comes to paying off their debt – remember that you are not alone – Licensed Insolvency Trustees offer professional advice about dealing with debt and can help you consolidate and manage virtually all types of debts, including credit card debt.