I’ve talked in and around the concept of credit card debt many times but I don’t think I ever focused an article on how to identify when credit card debt becomes a problem and what to do about it. I don’t think many Canadians are aware of the level of consumer debt in our country and the complacent acceptability of allowing it to accrue. The amount Canadians owe compared with how much they earn hit another record high last year. Here’s some startling figures from Statistics Canada and Equifax for the fourth quarter of 2016:
- Statistics Canada said the amount of household credit market debt rose to 167.3% of adjusted household disposable income up from 166.8% in the third quarter.
- Equifax said in its national consumer credit trends report that total consumer debt held by Canadians, including mortgages increased 6% compared with a year ago to $1.718 trillion.
- Equifax noted that while 46% of consumers were decreasing their debt, 37% were borrowing more. The average Canadian holds $3,954 in credit card debt as of Q3 2016, up from $3,946 in Q4 2015 – a year-over-year increase of 1.96%.
- Credit card delinquencies (90 days past due) were at 2.26% in the third quarter of 2016, compared to 2.15% in the fourth quarter of 2015, a year-over-year increase of 12.03%
- According to a December 2015 survey, 56% of Canadians claimed to repay their monthly card balances in full while 40% carrying balances said they pay much more than the minimum requirement; 16% of Canadians who don’t pay off their balances every month pay it off most months.
So, there’s the picture. The primary culprit for consumer debt is the use or misuse of credit cards. Sometimes the first sign of credit card debt trouble is that you ignore the signs: You don’t know what your credit card balances are, for example, or you just don’t open statements.
Your subconscious usually tells you when you’re in a danger zone. It may whisper at first, with headaches or sleepless nights. Other times it hollers. You can’t stretch your pay cheque to cover all your bills, or you avoid money discussions with your partner. But facing your credit card debt is the first step toward mastering it.
Indicators credit card debt is a problem
- Your credit card balances keep rising. It’s best to pay credit cards in full every month. Next best is paying enough to whittle down balances over time. If your balances are growing, your financial worries are, too.
- At least one credit card is maxed out. There’s one exception: Don’t count a balance-transfer card you’re using for debt consolidation – provided you have a plan to pay it off while the interest rate is in the low introductory period.
- You can’t pay more than the minimums on your credit cards.
- You can’t afford to save for an emergency fund. Emergencies happen, so you need at least a small reserve to cover them. If a car repair would mean you couldn’t cover your regular bills, something needs to change.
- You’re late on bills because you didn’t have enough money on the due date.
- You applied for credit and were rejected. That means creditors or card issuers see reason to believe you can’t or won’t repay money you borrow.
- You’re getting offers for credit cards for people with damaged credit – and you thought you had good or excellent credit. That’s a sign that something is tanking your credit.
If any of these apply, it’s time to take an honest inventory of your debt.
Cracking down on your credit cards
Simply checking for these warning signs means you’ve taken the first step. If one or more apply to you, keep moving along this path to turn your situation around.
Take inventory: First, make a list of every debt you have, along with the interest rate and minimum payment. Then, list your income and expenses for each month to assess your financial obligations.
Cut ruthlessly: Find where you can trim expenses. Any extra money you can put toward debt payments will get you debt-free that much faster.
Do the math: Going all in, can you successfully pay off this debt? If it’s more than 50% of your income, bankruptcy may be a more reasonable path to re-establish at least modest financial health. Schedule a free consultation with a bankruptcy attorney and a non-profit credit counsellor for assistance.
Pick a plan: If a do-it-yourself approach is within reach, choose a repayment method you’ll actually use. Two popular ones:
- Debt avalanche – Focus all extra payments on the debt with the highest interest rate until it’s paid, then move on to the next highest. This can save you money by wiping out your costliest debt first.
- Debt snowball – Start with your smallest balance and work up to the largest. The early victories can keep you motivated.
You can combine any payoff strategy with debt consolidation, which rolls several credit card balances into one debt at a lower interest rate. If you qualify for a balance transfer card or personal loan, it could help you pay off the debt sooner and for less money overall.
Track your progress and celebrate milestones: Rewarding yourself can help you stay motivated to pay down the debt, but don’t go overboard. Think picnic in the park rather than five-star restaurant meal. That is another topic for another date. While people can affectively find ways to crack down on their use of credit cards, what must change is their spending habits. Its like wait loss. You can go on a fabulous new diet and shred those pounds. But they will not stay away if you do not change your lifestyle and eating habits. More later. For now, for those so affected, let’s start by finding a way to wrestle down your credit card debt. Its an important healthy habit in Keeping Life Current.