Credit Card Debt Help Guide
Learn how to pay off credit card debt efficiently.
Credit card debt can be difficult to manage, especially when you’re living paycheque-to-paycheque. Credit cards are a form of revolving credit, which means the monthly payment requirement changes based on how much you owe. This combined with high interest rates can make it tough to pay off debt when you’re carrying balances on multiple cards.
Still, there are solutions that can help you minimize interest to make it easier to become debt-free. This guide will help you understand the challenges that credit card debt brings and how to overcome them. If you have balances that you need help paying off, call 1-888-294-3130 for a free consultation with a trained credit counsellor. We can help you find the best solution for your unique financial situation.
Canadian credit card debt statistics
Financial experts warn that Canadians are piling on too much debt, particularly when it comes to credit cards. They caution that both credit card balances and 90-day delinquency rates are increasing. For now, that trend shows no signs of slowing down in 2020.
- At the end of 2019, Canadians amassed over $100 billion in credit card debt for the first time.
- The average cardholder carries a balance of $4,240. 
- Nearly 3 out of every 100 cardholders have at least one bill that’s more than 90 days past due. 
- The average household holds $23,496 in non-mortgage debt, with credit cards accounting for nearly 20% of that balance.
- Canadians age 46-55 carry the highest average non-mortgage balance at $35,527. 
Understanding the challenge of credit card debt
Compared to loans like a car loan or a mortgage, credit cards have relatively high APR. Where a mortgage may have an annual percentage rate (APR) of 5%, the average APR on a credit card is just under 20%. At rates that high, roughly one-half to two-thirds of every minimum payment that you make goes to cover accrued monthly interest charges.
For example, let’s say you have a balance of $1,000 on a credit card at 20% APR. If the minimum payment schedule is 3% of your balance, then your minimum payment requirement is $30.
However, $16.67 of that amount goes to cover interest charges. You only pay off $13.33 of the balance you owe. As a result, it takes 63 payments or more than five years to pay off the balance with minimum payments. During that time, you would pay $601.50 in interest charges for a total cost of $1,601.50.
You can use our credit card debt calculator to see how much minimum payments will cost you. Enter your total credit card balance and average APR to see how long it will take to pay off everything you owe and how much you’ll end up paying.
The best way to manage credit card debt everyday
Ideally, you want to pay off any charges you make in full every month. This allows you to enjoy all the benefits of using credit cards without incurring the extra cost of interest charges. If you start and end every billing cycle on a credit card with a zero-balance interest charges never apply to your purchases.
Of course, if you make a large purchase or a series of purchases in a single month, it may not be feasible to pay it all off that month. In this case, you should review your budget to see how much you can afford to pay off per month. Then you can pay off the balance within a few payments, instead of taking years to pay off with minimum payments.
How to tell when you have too much credit card debt
Even if you’re managing credit card debt effectively as we describe above, it can happen that you start to carry balances on multiple credit cards. Events like vacations and big shopping seasons around back-to-school and the winter holidays can lead to credit card debt. You can also be forced to rely on credit cards to cover emergencies and unexpected expenses if you don’t have a large enough emergency fund.
An easy way to tell when you’re starting to get too much debt is to pay close attention to the minimum payment requirements on your credit cards. If your payment requirements exceed 10% of your take-home income, it’s a sign your balances are too high.
When this happens, you need to rebalance your budget so you can stop charging and focus on paying off your outstanding balances.
Solutions for paying off credit card debt
Carrying balances on multiple credit cards puts you at a higher risk of facing financial hardship. Luckily there is a range of solutions that can make paying down debt easier.
Credit card debt reduction plans
Your first option for eliminating balances on multiple cards is to implement a credit card debt reduction strategy. You use your budget to free up as much cash as possible. Then you focus that extra cash on eliminating one debt at a time until you pay off all of your balances.
Interest rate negotiation
If you have a credit card with particularly high APR, you can call the credit card company to request that they lower the APR applied to your balance. This may help you pay off a balance faster because more of your payment can go to paying off the principal; that’s the actual debt that you owe. This strategy can be used in tandem with a debt reduction plan.
If you can’t negotiate lower rates with your existing creditors, you may consider a credit card balance transfer. This is where you open a new credit card that offers low or no APR on balances transferred from other accounts. This allows you to minimize interest charges, so you can focus on paying off the principal on each balance.
Debt consolidation loans
If you owe more than $5,000, the solutions above may not be effective for helping you regain stability. In this case, you may want to explore debt consolidation loans. These are personal loans that you can use to pay off credit cards and other unsecured debts. This gives you the benefit of lower interest rates and fixed monthly payments.
When your credit card balances get too high for you to successfully pay off on your own, it’s usually time to call a credit counsellor. They can help you assess your debt and budget to determine the best way to get out of debt.
If it turns out that you need help paying off what you owe, they can see if you are eligible for a debt management program. This is a professionally-supported debt repayment plan that helps minimize or eliminate interest charges, so you can pay off the principal of your debts in-full. Doing so helps to limit the credit damage caused by seeking professional help.
In some cases of extreme financial hardship, you simply cannot afford to pay back everything you owe. In this case, you may pursue settling your debt for less than you owe. A private company negotiates with your credit card company to get you out of debt with a lump-sum payment.
Debt settlement companies are highly regulated in Canada, due to high instances of predatory practices. Make sure to proceed carefully if you decide to settle your debt through a private company. In many cases, you may be better off contacting a Licensed Insolvency Trustee.
Working with a Licensed Insolvency Trustee
Contacting a Licensed Insolvency Trustee (LIT) is generally a last resort to get out of debt because the solutions they offer will almost certainly damage your credit for years to come. However, if you need a clean break from the financial challenges that you’re facing, they are a realistic option.
A Licensed Insolvency Trustee will conduct a full evaluation of your debts, budget and assets to determine if you are insolvent. They will then recommend one of two solutions based on that determination.
- If you are not fully insolvent and can afford to repay at least some of what you owe, they will recommend a consumer proposal. This is a formal agreement between you and your creditors that repays a portion of the debts you owe. Once you complete the payments, any remaining balances are discharged.
- If you are fully insolvent – i.e. you are unable to repay what you owe – then the LIT will recommend bankruptcy. Any assets that you have that do not qualify for an exemption will be sold to pay off your creditors. Then your remaining balances will be discharged.
It’s important to understand that both options will damage your credit score. They also become part of a permanent public record. Thus, you should pursue every possible avenue to repay everything you owe to avoid these more severe options.
Credit card debt and your credit score
When it comes to your credit profile, credit card debt is a double-edged sword. Having credit cards and managing them effectively can make it easier to achieve and maintain a high score.
Creditors report your payment history to the credit reporting agencies (also known as credit bureaus). The bureaus, TransUnion and Equifax, both calculate credit scores based on information in your credit report, starting with payment history.
This means maintaining open, active credit card accounts in good standing can be an excellent way to maintain a strong credit profile. At the same time, challenges with credit card debt can negatively impact your profile. As long as you solve these challenges on your own, it generally will not damage your scores.
On the other hand, if you need professional help to get out of debt, it will likely cause some damage. In addition, if you don’t repay everything you borrowed and charged, it will typically damage your score more severely.
Certain debt relief solutions will be reported on your credit report for a set time. Here’s what you need to know:
|Solution||Credit reporting notation|
|Debt reduction||No notation or score damage if you keep up with your payments|
|Interest rate negotiation||Rate changes will not be noted in your report|
|Balance transfers||No notation or score damage if you keep up with the payments|
|Debt consolidation loans||No notation or score damage if you keep up with the payments|
|Debt management program||Noted in your credit report for two years from the date you graduate from the program|
|Settlement||Each settlement will be noted in your report for six years from the date of the settlement|
|Consumer proposal||It will be noted in your report from three years from the date of final discharge|
|Bankruptcy||A first bankruptcy will be noted on your report for six years from the date of final discharge; a second bankruptcy will be noted for 14 years.|