Many people in Ontario have way too much credit card debt and find it difficult to manage even minimum payments.
If you’re struggling with a lot of credit card debt, and need a way out of the minimum payment debt cycle it’s time to speak with a Licensed Insolvency Trustee at David Sklar & Associates. We will help you to understand all of your options so that you make the right choice. Read ahead to find out what you can do.
How Does Credit Card Debt Start?
Credit card debt can be very easy to acquire and very challenging to get rid of. Why is that?
Credit cards are integral to everyday spending, especially as online shopping and digital banking grow in popularity. You can use your credit card to cover everything from important monthly bills to late-night impulse purchases.
What’s wrong with this? The credit available on your card is not the same as the funds available in your chequing or savings account. Credit is borrowed and must be paid back. And the more that you borrow, the more that you have to repay later on. Adding more expenses — even small ones — to your card gives you a bigger financial responsibility to deal with in the future. This is why your card isn’t the best financial tool for everyday expenses.
Credit cards encourage you not to be mindful about your spending, as you can put purchases on your card without thinking too much about the financial repercussions.
Paying with a credit card is not like paying with cash. Paying with cash is a tangible experience. You notice how many bills you have left in your wallet after making a purchase and likely feel uncomfortable when your wallet is empty. With cash, it’s easier to understand that you have a clear spending boundary — if an item costs more than you have, you can’t get it.
Credit cards don’t offer you the same clear boundaries. You can put a purchase on your credit card, even if you technically can’t afford it right now. The only boundary with this financial tool is your credit limit. You might not reach this limit until you are thousands of dollars in debt.
Another factor that makes credit card debt so prevalent is high interest rates. Interest is a fee applied when you borrow money. It’s included on credit accounts and loans to give borrowers an incentive to repay the funds sooner rather than later.
Credit card companies offer grace periods between 21-30 days for you to make repayments without interest. After that grace period ends, you will start getting charged interest.
Calculating Credit Card Interest
A standard annual percentage rate for credit cards in Canada is 19.99%. In some cases, it can go up to 29.99%. The annual percentage rate is the approximate amount of interest that the card owner is expected to pay in a single year.
Your credit card balance does not acquire this interest at the end of the year. It acquires this interest over the course of the year. So, your outstanding balance doesn’t get the charge one time. It collects charges every day after the grace period until the balance is paid off.
Those daily interest charges get bigger over time because of “compound interest.” Your interest charges are based on the balance sitting on your card. As your balance collects interest charges, it will get bigger. The bigger your balance gets, the more interest you get charged.
With compounding interest, you can see how easy it is for your credit card debt to snowball. If you don’t catch up with repayments fast enough, you could have a very hard time managing this financial problem.
How Do You Eliminate Credit Card Debt in Ontario?
Is there a way that you can get your credit card debt under control? Here are the solutions that are available in Ontario:
Balance Transfer Cards
You could transfer your balance to a different credit card with a lower introductory interest rate to eliminate your debt in Ontario. You’ll still have to tackle the same debt load, but its potential for growth will be much smaller.
This strategy comes with potential problems:
- Your introductory interest rate will only apply to your transferred balance, not new transactions. So, you will have to be careful about future purchases.
- If you make new purchases on the card, your payments are applied to the transferred balance first, and the new purchases remain at a much higher interest rate.
- Your card may have a lower credit limit to account for the lower interest rate.
- You may have to pay additional costs like transfer fees.
- You will have to fight the temptation to use your old credit card and rack up even more credit card debt.
- When the introductory period ends, all of the remaining transferred debt reverts to the full interest rate.
If you get a balance transfer card, you should focus on budgeting and expense tracking to help you pay down your balance aggressively.
Making Minimum Payments:
With credit cards, you have the option to make the minimum payment when you can’t afford to pay your bill. The minimum payment allows you to cover a portion of your credit card debt without collecting a late fee or penalty. This can come in handy when you’re struggling financially.
However, paying the minimum is not the best habit to rely on. The amount will be too small to put a significant dent in your debt. It will take you a very long time to pay down your balance, and because of compounding interest, you will end up spending much more to reach that goal than if you made payments above the minimum.
Look at this example. Say you have $10,000 of credit card debt on a card that has a 19.99% interest rate. The minimum payment for this amount of debt would be approximately $200. In that case, it would take you over nine years to pay off your credit card debt, and you would pay $11,660.67 in interest. That would balloon your $10,000 debt total to $21,660.67.
Increasing your payments could make a big difference. If you made a monthly payment of $300, it would take you approximately 50 months (four years and two months) and $4,714.12 in interest. If you made a monthly payment of $500, you would take 25 months (two years and one month) and only $2,464.59 in interest.
As you can see, the smaller you make your payments, the more time and money you will waste. The bigger your payments, the faster you can pay down your debt.
A consolidation loan is another way to help you with eliminating your credit card debt in Ontario. This is a loan that helps you pay off a combination of debts at the same time. You can get this type of loan from a private lender or bank.
Private lenders typically have fewer qualifications for consolidation loans than your bank, but they often have higher interest rates. This could undermine your debt repayment strategy.
Banks will require a spotless credit history, a good credit score and a steady income to get a consolidation loan. You may also need a co-signer, strong home equity or another asset to use as collateral.
There are some risks when you consolidate your credit card debt. If you secure the consolidation loan against an asset, and you fail to repay it, the provider can seize the asset and sell it. For instance, failing to repay a home equity loan could mean that you lose your home.
When you consolidate your credit card debt with the help of a co-signer and you fail to repay your loan, they will become responsible for it. The lending institution will pursue them for repayment.
While consolidation loans can be a good solution for some people looking to get rid of their credit card debt, it’s not a good solution for everyone. They don’t address the root cause of credit card debt. Some people max out their credit cards all over again and take out other consolidation loans to fix it. Here at David Sklar & Associates, it’s not uncommon for us to have clients who have two or more consolidation loans.
A Debt Management Program
Debt management programs can be used for eliminating credit card debt in Ontario, but these are solutions best left to solvent debtors. If you’re able to pay the principal of the debt that you owe but not at the current interest rate, then you could look into this option.
There are many credit counselling companies in Ontario, but not all offer legitimate debt management programs. If you decide to try a debt management program, check to see that the counsellors are members of the OACCS (Ontario Association of Credit Counselling Services) and have the training and qualifications to correctly manage this credit card debt relief strategy.
During a debt management program, your counsellors will contact your credit card companies. They will try to negotiate an agreement to reduce the amount of interest that you’re being charged on your credit card debt. If your creditors agree to this negotiation, you will then be required to make regular payments for disbursal to your creditors.
It’s important to know that this agreement between credit counsellors and credit card companies is not legally binding. Your creditor can break the agreement whenever they want to.
Credit counsellors also cannot provide any legal protection. If a creditor has taken legal action against you for the purpose of debt repayment, your counsellor cannot stop them. They do not have that authority.
If you’re worried about a creditor taking legal action against you, you should know that Ontario’s statute of limitations for credit card debt collection is two years. After you’ve passed that threshold, they cannot legally pursue collection actions.
A consumer proposal is another strategy that helps you consolidate your credit card debt. However, this strategy is designed for anyone who has been declared insolvent. If you can’t use the previous debt solutions because of your financial situation, then a consumer proposal might be the right choice for you.
A consumer proposal is a formal, legally binding agreement made between you and all of your unsecured creditors. In this proposal, you are asking to pay these unsecured creditors a percentage of the total debts that you owe. You could reduce your debt total by up to 80%. You are also asking to extend your time to pay back your unsecured debts (including your credit card debt). With a consumer proposal, you have a maximum of 5 years to complete your consolidated payments to creditors.
Licensed insolvency trustees are the only professionals that can file and administer consumer proposals. No one else. Your unsecured creditors will vote on whether or not they accept the terms of your proposal. If a majority of them accept, then the proposal goes into effect. The moment that your consumer proposal begins, all of your interest charges stop. All collection efforts and legal actions from your unsecured creditors must also stop.
Licensed Insolvency trustees have the authority to hold creditors to agreements. When your creditors sign onto a consumer proposal, that agreement is now legally binding. Every creditor has to adhere to those proposal terms from that point forward.
Once the proposal goes into effect, you will start your consolidated payment plan. You will also have to attend financial counselling sessions. These sessions will give you the tools to build a more financially secure future. You can use those tools to get control of your credit spending, improve your credit score and stay out of serious credit card debt.
Once you’ve made all of your payments and attended all of your credit counselling sessions, your proposal is complete. Your debts to these unsecured creditors will be officially paid in full.
Personal bankruptcy is typically a last resort solution for people who can’t repay their debts and are looking to eliminate their debt in Ontario. A licensed insolvency trustee will recommend that you try other strategies, like a consumer proposal, before turning to bankruptcy.
Filing for personal bankruptcy means that you are declaring to the Courts and your creditors that you are insolvent and that you do not have the ability to pay all of your debts.
During a bankruptcy, you may have to make payments to the benefit of your creditors and attend creditor meetings before receiving a discharge. A licensed insolvency trustee will also settle your assets and distribute the funds amongst your various creditors. Some of your assets will be exempt when you file for bankruptcy in Ontario, so be sure to know what asset exemptions there are.
David Sklar & Associates
If you are struggling with credit card debt and looking for relief, call David Sklar & Associates and book your consultation today. We offer consumer proposals in Toronto to help honest people who are drowning in unsecured debt and need an effective way out.
If you don’t qualify for a consumer proposal, we also offer division one proposals and personal bankruptcy services for anyone who can’t file a consumer proposal. You have options.
We’re here to help! Our trustees can guide you to the right solution so that you can get the credit card debt relief that you’re looking for.