Credit card debt is one of the easiest kinds of debt a person can sink into.  Almost every Canadian owns at least one credit card and, on average, uses it at least once a week.  Consider a person who spends normally, but then suddenly loses a job, takes time off for illness or goes through a divorce. Debt can pile up quickly.

All scenarios can contribute to an escalating level of debt that can make or break a person’s financial stability.

See this interest calculator chart to see the amount of interest minimum payments generate.

When a person fears opening their monthly credit card statement, it shows a clear sign of debt already spiralling out of control.  So how can you manage this kind of debt?

The following are paths people have taken:

  • Paying the minimum only.  All creditors will offer the consumer a minimum payment amount to keep the debt in good standing.  For example, if the total debt owed on a credit card is $2,500 at 19% interest, the creditor will require a minimum payment of $75.00.  Seems reasonable at first glance, until you do the math.  In reality, you will end up paying 161 monthly installments of that $75, taking up to 13 years to pay off your debt.  Here’s the real kicker – instead of just paying your original debt owed ($2,500), you’ll end up paying $4,951.67; of which $2,451.67 is solely interest.  Yes, the minimum payments are mostly just interest on the original amount you owed.  Basically you’ll be paying for years without getting you anywhere.  Does paying the minimum payment sound good to you now?
  • Consolidate your credit card debts.  You can seek assistance from a professional credit counselor that will combine all of your credit card debt into one lump sum that will pay down each month on a combined lower interest rate.  You can extend your repayment term to reduce your monthly payments; however this will prolong your repayment period. Consolidating your outstanding credit card balances into a loan with a lower interest rate could reduce your interest costs substantially depending on the rates charged by your credit cards.  Consolidating your debt can simplify your finances by giving you just one monthly payment to make.  Be prepared to pay every cent back, at the lower interest rate by going this route.
  • Obtaining a Formal Consumer Proposal.  Basically, a consumer proposal is a contract that’s negotiated with your creditors on your behalf, by a consumer proposal administrator (also called a Bankruptcy trustee). A legally binding agreement is put in place to arrange for a partialrepayment of your total unsecured debt owing. You’ll pay a portion of what you owe, and your creditors will agree to ignore the balance owing. You will have to include all of your debts and cannot prioritize any creditors.  There is no flexibility with a Consumer Proposal, and if you miss any payments with a Formal Consumer Proposal, the proposal then becomes null and void.
  • Declaring Personal Bankruptcy.   When you declare bankruptcy you surrender everything you own to a trustee in bankruptcy in exchange for the elimination of your credit card debts. Personal bankruptcy is a legal process, governed by federal law (the Bankruptcy & Insolvency Act).  To go into bankruptcy in Canada, a person must live or do business in Canada, and must be insolvent. To be insolvent means:
  1. To owe at least $1,000.
  2. Not to be able to meet your debts as they are due to be paid.

Depending on how many times it has been legally declared, a bankruptcy will remain on your credit rating or score for a minimum of 6 years up to 14 years. Through a bankruptcy you cannot obtain credit again for 6 or 7 years.

  • Consider assistance from a debt settlement or debt relief firm.  There are many choices out there for debt relief, so it is important to do your research on each company to see what each offers.  Reputable debt relief companies will offer free financial assessments and assistance with your budget.   There is a fee that comes with this kind of service, but reputable companies will start negotiating with your creditors immediately to agree on a repayment plan that you can afford.

Credit card debt is an easy trap to get into with the constant lure from credit card companies and their reward programs.  Before you consider owning one or more credit cards, consider your spending habits and ability for purchase restraint.  Don’t sink into paying only the minimum payments – you’ll end up paying the debt off for years…plus interest.

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