Making Headway When You Pay Off Debt
If you’re making payments without making progress, then you need to change tactics.
When my husband lost his job, we used our savings to stay afloat. But then that ran out, we had to start using our credit cards to get by until he could find something else. Thankfully he did and now we have the income we need to get ahead again… or so we thought. We’ve been making payments for about a year and a half but can’t seem to make any headway to get rid of the credit card debt we built up. Why? And how do we make a plan that actually gets us headed in the right direction?
This is actually a really common problem that people run into with unemployment, so we’ve seen more and more cases like yours since the recession. The problems you’re having are probably two-fold and here’s why:
- During your husband’s unemployment, you probably ran up a large amount of debt on your credit cards. Since most credit is revolving debt, what you owe increases right alongside the amount you charge. So if you use credit to cover cash flow problems in your budget, your bills eat up more income every month and eventually reach a point where you can’t afford to pay.
- This is where the second part of your problem rears its head – added interest. Credit cards tend to have high interest rates. As a result, the majority of each payment you make usually goes to paying off interest accrued instead of the original debt. The situation gets even worse if miss two payments in a row. Most creditors will apply a penalty interest rate that will remain on your account until you make six consecutive payments on time.
So if you missed payments on one or two of your credit cards while you were struggling or during this time where you’ve been working to regain control, then you could easily be facing interest rates close to 30 percent or more. Interest that high on a large volume of debt is a mess for you to try and pay back using traditional means.
The first thing you need to do is use a debt calculator to see how long it will take to pay off each credit card debt you have at your current interest rates. If your husband’s income is high enough for you to make bigger payments, factor that into your calculations.
If it’s going to take more than 5-10 years to pay everything off even if you make bigger payments, then it’s time to find an alternative. This is where credit counselling can come in handy. A certified credit counsellor evaluates your debts, budget and credit score to help you find a solution that will fit your needs.
Depending on the specifics that you and your husband are facing, you may use:
- DIY debt consolidation
- A debt management program
- Debt settlement
Those last two options should only be considered if there’s no way for you to consolidate to get ahead. You can usually consolidate with a debt management program as long as your debts are not behind six months or more – regardless of your credit score. DIY consolidation options usually require good credit to qualify at the right terms, so if you and your husband’s credit score took a hit during your hardship, you may have a hard time consolidating on your own.
Again, a certified credit counsellor can help you go through all of these options so you can choose the right option for your situation. Give us a call and we can help you get started.
Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).
If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to AskJeff@ConsolidatedCredit.ca. You’ll get the expert advice you need and your question may be featured here on our website.