If you find yourself reading this blog, it is probably safe to assume that you or someone you know is overwhelmed by credit card debt and wondering what to do about it. In this blog, I’ll talk about credit card debt, credit card debt forgiveness and a couple of options.
Credit Cards: The Risk and Reward
A credit card can be utilized for many different reasons. Below we’ve listed some of the most common uses and types:
REWARD CARDS – Perhaps you have a card where you can earn cash back or travel miles by making purchases. Reward type credit cards will usually have a small annual fee but if used correctly, you can actually earn more than you pay.
SECURITY DEPOSITS – Some people are required to travel for work or choose to travel for pleasure. Whether you’re heading to that out of town concert, taking your family to Florida for a couple of weeks, or traveling out of province for work you will most likely need a credit card to book your hotel room and, if desired, rent a vehicle to get around.
METHOD OF PAYMENT – Another example of where credit cards come in handy is when they are used as a method of payment. They can be used to make either a big purchase, pay large vehicle repair bill or simply for convenience.
SUPPLEMENTING INCOME – It is handy to have a credit card to book a hotel room, earn travel miles or even purchase that 4D 60” television that you have always wanted; but what happens when you simply do not earn enough money to meet your basic needs? Sometimes people will use credit cards to supplement their income.
These types of purchases are dangerous and will eventually lead you to read this blog or even visiting a Licensed Insolvency Trustee for help. If you find yourself in this category, you may want to take stock in your monthly expenditures to determine what expenses you can either reduce or cut out.
For whatever reason that you may find yourself using credit cards, it is best to avoid high interest rates by not carrying a balance.
Carrying a Credit Card Balance
Most credit cards have an interest free period. If you can pay your purchase off before the end of this grace period you will save yourself some interest. It is important to know, however, that if you are carrying a balance already, any payments you make will go to the previous balance and as a result, you will have interest accumulate. The best way to control your debt is to make sure that, as much as possible, you carry a low balance or even no balance on your credit cards.
Did you know that if you carry a balance on your credit card (or any debt product) that is more than 50% of what you can borrow, your Beacon Score (on your credit report) suffers? Keep your balances low and if you can’t pay them off in full, keep your cards at less than 50% of its limit.
Credit Card Interest Rates
Interest rates are generally quoted as an annual percentage rate (APR) but are compounded daily. What does this all mean?! Let’s say that you purchase a television for $3,000 on a credit card with an APR of 19.99%. We will ignore the interest-free period and assume that you made no payments. The daily interest rate (19.99/365) would be 0.05476% per day. Sounds small enough I suppose but wait until it starts to get compounded. Day one your interest would be $1.64. Now extrapolate that over a 30 bill cycle and you get interested for that period of $49.68. The interest will add up!
Now, let’s look at some other interest rates on the same purchase. Suppose you purchased the television on credit where the interest rate was 46%. Interest accumulated through the first month would be $115.52. If you had a line of credit at say 8%, your first month of interest would total $19.79.
These numbers are estimates and used to only show you the impact that interest can have on your personal budget.
Debt Forgiveness and Credit Cards
A creditor may choose to offer a partial forgiveness of the debt or waive interest for a period of time. Debt forgiveness may also come by the hand of the Bankruptcy and Insolvency Act. Below is just a few ways that debt might be forgiven. This is not an exhaustive list.
Voluntary Debt Forgiveness
Credit card debt forgiveness may happen voluntarily by a creditor that wishes to resolve an overdue account. If your account has gone to collections, it is possible that you will be offered the opportunity to pay a lump sum payment, which is less than what is owed, in full satisfaction of the creditors claim. The caveat here though is that the creditor will most likely want it as a lump sum payment. The opportunity, if you will, can be quite burdensome.
Interest Free Period
A creditor may also accept the fact that your current situation is such that you are unable to make payments but if given a break, you may be able to work your way out. That break may come in the form of an interest free period. If you are so lucky, a creditor may waive interest on a debt product for a limited period of time. It is expected that you would agree to make a certain payment each month to the creditor during this period in order to keep the break on the table.
Bankruptcy and Insolvency Act
When an honest but overburden debtor can no longer make the required payments they may turn to the Bankruptcy and Insolvency Act for relief. This relief can come in the form of either a bankruptcy or a proposal. A debtor that turns to this remedy will have their debt forgiven, provided they complete the required duties. The cost of a bankruptcy or proposal will be driven by the household income and certain assets. For a better understanding it is recommended that you speak directly with a Licensed Insolvency Trustee.
Filing a proposal or making an assignment in bankruptcy, at first blush, is usually considered a less than ideal solution. However, if given more thought and consideration, either of these two options can help you achieve the ultimate goal of having your debt forgiven and getting your that fresh start that you have been fighting for.