Are you on debt row? Are you only making the minimum payments? Do you have more than 10 credit cards? Are your credit cards maxed out? Are you taking from your savings or retirement fund to pay your bills? Do you not have enough after paying your bills to build a savings account? Are you living pay cheque to pay cheque? Are you spending more than 15% of your net income toward servicing non-mortgage debt? If you answered yes to all or most, you are on debt row.
The average interest rate on a credit card is 19% and the average person pays only the minimum payments each month. By doing this it would take 18 years to pay off a $5,000 loan and just over $5,000 in interest.
Ed Portelli, president and owner of OCCA Consumer Debt Relief, is an expert on debt collection and debt repayment. He knows what a mousetrap it is making only minimum payments on a credit card.
“With some retail credit cards, you’re talking about a 120-year repayment term. For a regular credit card, you’re talking 30 to 50 years,” Mr. Portelli says. “This is for an object that you bought when you were 30 and the plan is to pay it off by the time you are 60. That’s if you don’t use the card again. As you pay down the minimal amount, you start to refill it up again.”
As Melissa Leong, writer with Financial Post, indicates, “If you’re only making the minimum payments on your cards, you’re going to end up spending loads of money on financing charges. For example, if you put a new $1,000 plasma television on your credit card which has an 18% interest rate and you only make the minimum payment of 2% or $10 (whichever is greater), it would take you almost 20 years to pay it off. You would have spent $1,931.11 in interest payments on top of the television.”
Gail Vaz-Oxlade, financial expert and host of NEWSTALK1010 talk show “the Late Shift”, stressed on “The Agenda” that “minimum payment is an anchor. If it’s taken away from bills, people would pay more per month. Studies have proven this. If you include a minimum payment on bills, people will pay this. It will keep people in debt longer and keep them paying interest.”
So if a consumer has already racked up $5,000 in loans and can’t pay them in full, how can more credit allowance be given by creditors? Creditors have the authority to pull a credit report if there is doubt of the consumer’s ability to repay a loan.
Based on the Consumer Protection Act, a creditor must believe that there is a reasonable probability that you will be able to repay a loan before they approve it, Mr. Portelli says.
Creditors, he argues, hold some of the blame for encouraging people to borrow beyond their means. “When you fill up your line of credit, you have no potential to pay it down and then they give you more,” he says. “They’re trying to get a bigger market share of debt out there; they want to get people as much as possible in their hands.”
Gail pointed out, “that if banks would lend like they did years ago we wouldn’t have the debt we have. For example, instead of basing a decision to lend on a credit score, banks should take a more in depth analysis of an applicant’s employment, the capacity of the person, collateral for security.”
So I guess we can say that the recipe for debt row is as follows:
5-10 credit cards maxed
A cup of interest
Paying only the minimum payments on bills
A cup of additional credit allowance each year from creditors
1-2 tablespoon(s) of funds from your savings or retirement plan
1 dash of hope in hell
Continue spending more than you earn and within a year or two you have cooked yourself into some deep debt.
If you are currently living on debt row or are getting close to it, contact OCCA Consumer Debt Relief. We are experts in debt management and have helped thousands of Canadians resolve debt for over 12 years. A free financial assessment will help determine what debt relief option is right for you..
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