Debt relief

Paying off a massive credit card bill is a daunting task, but Bruce Sellery says it can be done with the right plan of attack.

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Question

I have a gigantic credit card debt. I want to honour my debt, however long it takes to pay off, but the credit card companies keep raising their rates. How can I lower my interest rates? I pay more than the minimum each month, but I find it hard to gain any ground. I have many friends who have taken the easy way out and declared bankruptcy—one has done this more than once and it disgusts me. I made the original debt, I will pay it, but I just want a little help.

Answer

There is help available and now is the time for you to get it. It must be incredibly frustrating to pinch your pennies every month and never feel like you’re getting ahead. The good news is there are a number of ways to attack your “gigantic” debt. Here are the steps to follow to find the best way for you.

Seek out help: Your first step should be to call one of the non-profit credit counselling organizations that operate across the country. An Internet search will help you find one locally. For example Credit Canada serves Ontario and the Credit Counselling Society serves B.C. These organizations are funded in large part by donations from creditors. In some provinces they charge a fee, in others the services are free.

Know your options: A credit counsellor will be able to assess your situation and take you through your options. Bankruptcy might be one of them, though I know that doesn’t appeal to you. There is also a consumer proposal, the debt management program, a consolidation loan or the option of simply sticking to a strict budget that will free up more cash to pay down our credit cards over time.

The debt management program and consumer proposal are similar, but there are some important differences. For instance, under the debt management program all of your debts in full and all future interest is forgiven, but with a consumer proposal you may not necessarily be asked to repay your debts in full. You will make payments based on what you can afford, which may not be the full amount you owe.

Investigate the debt management program: You mentioned how important it was to you to pay off your debts in full. Anita Moore, a counsellor with the Credit Counselling Society, says with a debt management program, the interest on major credit cards usually goes to 0%. That would allow you to get out of debt much sooner, rebuild your credit rating faster, and ensure that your creditors get 100% return on their dollar.

If you go this route, your credit counsellor will help you develop a repayment plan that is sustainable, based on your income and expenses. He or she will work with your creditors to reduce or eliminate interest charges and fees, as well as arrange a single monthly payment.

This is not a free ride, of course. As Moore mentions, your credit rating will be negatively affected for a couple of years. “But sometimes it’s worth it to take a hit,” she says. A large credit card debt could take more than 10 years to pay off at minimum monthly payments, Moore explains, this program could allow you to be debt free in half that time. And don’t forget about the money you would save on interest charges.

Consider other ways to lower interest rates: You did ask about other ways to lower your interest costs. Here are some ideas, but don’t use them as a way around booking a meeting with a non-profit credit counsellor. Take that step first and take it fast.

  • Co-signer: You could try to find someone to co-sign a debt consolidation loan from the bank. There are definite pros and cons to this approach and neither party in a co-signing arrangement should go into it without considering the implications.
  • Low interest rate card: Call your credit card company and ask if they have a low interest rate card. You may have to pay an annual fee, but it is often worth it if you can get your rate down from 25% to say 10%.

It is encouraging that you accept responsibility for your situation and are ready work on getting back on track. In addition to developing and sticking to a budget, you need to stop using your credit cards. Period. Moving to a cash-only lifestyle is one of the most effective ways you can alter your behavior around credit.

Good luck.

ask@moneysense.ca

4 comments on “Debt relief

  1. Many times the "get out of debt" solution looks to be mathematical, however really it is psychological.

    The problem is that there are many companies that have come into existence telling people they can get out of debt by taking on more debt. Never really the best psychological move.

    Reply

  2. I had tried the snowballing technique to payoff multiple credit cards. I started with the lowest balance first; that way it would free up the minimums faster to help snowball the payment for the next one (psychological). I had equity in a home so I used an equity loan to consolidate the cards when I could. I cut all but one cards and avoided charging more to it. I also focused on increasing my cash flow by reducing some of my expanses (like calling utilities and phone companies for a lower rate, etc) and increasing my income (working overtime, another part-time profession, etc). Every extra dollar I had I used it to lower the balances on the cards. I was able to pay off more than $35K in credit card debt and my student loans in less than three years. Never again will I let this happen to me. I learnt some very valuable lessons like "earn more than you spend" and "Grow your cashflow."

    Reply

  3. If you are getting into more and more debt every month then it means that you are spending more than you are making and its time to evaluate your Cashflow.
    CASHFLOW = Total Income – Total Expenses
    Get into a habbit of evaluating your Cashflow EVERY month. That way you can take immediate actions if it becomes negative. Then you can decided whether to increase you income or to reduce your expanses. My preference is increasing your income. That way when the debts are gone, the mindset to make more money is there!
    CASHFLOW is the lifeblood of your financial independence. Protect it, grow it, love it and NEVER EVER let it be negative.

    Reply

  4. Actually i came here while searching on google for that term and its just awesome article. i like it and share it to my fans. So I like to tell you that your 4th point is most powerful then any other. appreciate it

    Reply

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