Get out of Debt…and Into $$$
There’s no miracle cure for getting out of debt. It requires spending less than you earn, and it can take several years.
“ My name is Anne, and I’m a compulsive debtor.”
Like everyone gathered at the community centre in downtown Toronto, Anne came to Debtors Anonymous, a 12-step program modelled on Alcoholics Anonymous, for help. Anne and hundreds like her gather in community centres and church basements across Canada each week to share their stories: of being paralyzed with fear of the next collection-agent call; of not being able to pay the rent or the mortgage; of hiding their desperation from friends and family; of attempting suicide. They know that sick dread of opening the mailbox, wondering which bill is now due. They’ve seen how debt can destroy relationships and lives. They’re teachers, letter carriers, clerks, executives and artists. Many are highly educated. Some have healthy incomes; others make minimum wage.
What they have in common is an overwhelming temptation to spend more than they earn. If you think that makes them different from the rest of us, consider this information from People Patterns, a Sooke, B.C.-based consulting firm:
• Canadians put almost $170 billion worth of stuff on VISA and MasterCard in 2004. That’s up from $39 billion in 1990.
• Over 30 percent of us do not pay the balances on our credit cards each month; and 15 percent of Canadian men and 18 percent of women are worried about being able to make the minimum payment. Small wonder: In 2004, Canadians’ savings rate—the percentage of earnings we put away—dropped to an all-time low of 0.4 percent, compared to 13 percent in 1990.
• Total consumer debt in Canada is nearly $26,000 per person (including mortgages).
Grim as that sounds, “we do have options,” says Ellen Roseman, author of Money 101 and Money 201 and past president of the nonprofit Credit Counselling Service of Toronto. With the right attitude and a little credit know-how, she says, anyone can climb out of the hole and stay debt-free for life.Just ask Pierre and Suzanne* of Ottawa. In the 1990s, when the couple were in their mid-40s and thinking about retirement, Pierre, a teacher, began putting all of their purchases on four credit cards and a line of credit. “I was taking cash advances on my cards and putting vacations on credit,” says Pierre. “Anything I wanted, I bought.” Pierre was earning $60,000, and Suzanne, a part-time grocery-store clerk, was earning half that, but by 2003 they were $50,000 in debt.
Suzanne had no idea this had been happening, but three years ago she found a credit-card bill. When she read the balance, she flipped. “I told him I’d leave if he didn’t get help and find a way to fix the mess,” says Suzanne. “To be honest, I’m surprised we made it through. I must really love him.”
Pierre joined the Ottawa chapter of Debtors Anonymous and cut up all his credit cards. Suzanne assumed responsibility for paying household expenses so Pierre could concentrate on the debt. He still owes $19,000 but is on track to be debt-free in two years. “I am very proud of him,” says Suzanne.
“ I have completely changed my ways,” says Pierre. “I now have one credit card with a very low limit, which I keep in a drawer and rarely use.” Such is his attitude shift that when he recently used it to order flowers for Suzanne, he absent-mindedly put it in his wallet. “When I saw it there, I was shocked and thought, Get away you devil, and put it in the drawer,” says Pierre. “I finally understand that credit cards are a way for banks to make money at my expense.”
It wasn’t always this way. The banks introduced Chargex, Canada’s first credit card, in 1968 as a convenience for good customers who could be counted on to pay the bill every month. The business grew steadily but remained fairly genteel until the mid-1990s, when Canadian banks took a page from their more aggressive counterparts in the United States and introduced “late-payment fees,” charges—either a flat rate or a percentage of the amount borrowed—to customers who don’t make monthly payments by the due date. Since then, late-payment fees have become institutionalized.
This is a recent development, says Roseman. “The banks used to be happy with the same interest rate for late payers. Not now.” Higher rates offset the risk of consumer default—that’s what the banks argue—encouraging them to offer more credit to more people. Today the Canadian credit-card market is one of the world’s most competitive, with more than 600 institutions in Canada issuing VISA and MasterCard. According to market research firm Mail Monitor, in 2003, Canadians received 191.7 million credit-card offers—about six for every man, woman and child.
How many do we actually carry? Three for every Canadian over age 18 (74 million credit cards), making it possible to rent cars, shop for deals on the Internet and buy plane tickets. “We are dependent on credit,” says Stanley Kershman, an Ottawa-based bankruptcy lawyer and author of Put Your Debt on a Diet. What you don’t need, he adds, is the long-term debt. Banks make more interest when people pay over time; that’s why minimum payments on credit cards sit at around three percent. With payments that small, it sounds so easy.
But wait—nearly 40 percent of college and university students with credit cards owe money on them, and the average debt is $1,500. If the student pays only her minimum payments of, say, 2-1/2 percent, assuming an 18 percent interest rate, it will take her 16 years to pay it off—at a total cost of $3,365.Financial experts agree that personal responsibility could prevent most debt problems; don’t spend it, and you don’t have to pay it back. But they put some of the blame on the banks, which lure new customers with low rates, then jack up the interest if they’re late on just one payment. “If you get a card with a low introductory rate of, say, 2.9 percent and you miss a payment, your interest rate could shoot up to 16.9 percent,” warns Kershman. It’s always in the fine print, so read it.
Kershman has seen it all. “I had a gentleman come in who was earning about $40,000 a year, and he got a credit card with a $10,000 limit and a line of credit for $20,000. It was far too much debt for him to take on, but the banks let him, and in the end, he had to declare bankruptcy.” This scenario is played out all the time, Kershman says. “Financial institutions are part of the problem, but you have to be comfortable with the debt you take on, because you’re the one who has to pay it back.”
How much debt is okay? First, consider whether it’s good debt or bad. Anything secured by property you can sell is good debt—think GICs, Canada Savings Bonds, the family home. Roseman recommends your mortgage payment, property tax and home insurance total no more than 30 percent of your gross pay. Kershman looks at it another way. “If you spend 75 percent of earnings on living expenses, five to ten percent for charity and the balance to savings, you’ll be well off.” Student loans are okay so long as you have a plan to pay that debt. Car loans—up to four or five years, with a low interest rate—are also acceptable. “If it’ll take you seven years to pay off the loan, it’s too nice a car,” says Kershman. Your monthly debt payments should never be more than 40 percent of your take-home pay.
As for credit-card debt, most experts agree that any is too much. “If you can make only the minimum payment on your cards each month,” says Kershman, “you’re living beyond your means.”
Rather than have to declare bankruptcy, many who struggle to keep up with bills seek help from nonprofit credit-counselling agencies (there are commercial agencies, but you pay a fee to use them). Nearly 300,000 Canadians visited such an agency in 2003, up 15 percent over 2002. These registered charities have a track record in acting as third-party mediators to help you work through your credit-card debt and stop the collection agencies from calling.
Here’s how it works. The agency puts you on a debt-repayment program and asks your creditors to stop charging interest or reduce the rate. This can be a huge relief, especially with some store cards charging 28.8 percent. You make one monthly payment to the agency, which then disperses it on a prorated basis to your creditors. The creditors then donate a percentage of what they get to the agency (since they’re happy just to be paid something).
You may be charged a fee based on your ability to pay. To find a nonprofit credit-counselling agency, visit Credit Counselling Canada’s website at www.creditcounsellingcanada.ca.
Living debt-free is about more than getting creditors off your back. Knowing she can weather hardships brings priceless peace of mind to Deborah, 47, of Winnipeg. When she was a 27-year-old single mom and student, she went deep into debt because she depended on her credit card to get by. “I was scared to answer the phone because it could be a collection agency,” she recalls. “I was on income assistance and had no job, but I owed $10,000. There was no way I could pay it back. I was terrified.”
Deborah declared bankruptcy and got a job. But a few years later, when she was allowed to get a credit card again, she slipped into her old ways. “My problem was, When you get one card, you can get more,” says Deborah. She maxed them out shopping for the sake of shopping and making sure her daughter had all the latest fashions. “I wanted it to appear to others we were doing well.” Soon Deborah was carrying a balance of $17,000 and struggling once again to pay the bills. “I’d pay hydro one month, cable the next.”
She finally saw the writing on the wall and went to a bankruptcy trustee, who put her on an orderly payment of debt program rather than have her declare bankruptcy. She knew it was finally time to change her ways; she cut up her credit cards and committed to living within her means. Today, four years later, Deborah is debt-free. She got married last year and recently started her own company, making stained glass. “I’ve completely changed my lifestyle, for good,” says Deborah. “I no longer shop to be trendy. I don’t buy anything unless I need it—and I pay with cash.”
“ It’s all about keeping up with the Joneses, but we’re on a runaway spending train. The only way to put the brakes on is for people to simply say ‘I can’t continue like this.’”
Beware Payday Loans & Cheque-Cashing Outfits
You have probably noticed the growth of payday loan stores. According to the Canadian Association of Community Financial Service Providers, there are now over 1,000 across Canada. They’re geared to people who have a poor credit history that limits their access to other forms of credit. For many who use them, such outfits are the last thing they need. Here’s how they work: You don’t have enough money to make it to your next paycheque, so you go to a payday lender or cheque-cashing service that will lend you, say, $100 until your next paycheque. You get your $100 instantly, and write a cheque for $115 dated the day of your next paycheque. That would work out to an annual interest rate of 391 percent if the debt remained unpaid (the maximum annual rate allowed under the Criminal Code is 60 percent). Several class-action suits have been filed against providers of payday loans, and governments are looking into regulating the industry.
It’s a way of life her 28-year-old daughter has adopted after seeing what happened to her mother.
“ She has never had a credit card,” says Deborah proudly. “My daughter refuses to be put in the world of foolish payout.”
Leading by example could be the best hope for a debt-free future. “Right now we’re teaching our kids to associate happiness with spending,” says Sean Junor, senior policy and research officer with the Canada Millennium Scholarship Foundation.
Shop Around for Cheap Credit Cards
The financial consumer agency of canada offers a comprehensive list of credit-card interest rates on its website (www.fcac-acfc.gc.ca). It compares the features of more than 200 cards issued by 26 Canadian issuers. Industry Canada also has a credit-card-costs calculator that will let you see just how much you’re actually paying.
What’s Your Score?
You probably know you have a credit record lenders use to determine creditworthiness. But did you know your credit report can also be examined (with your permission) by employers, landlords, utility and insurance companies?
So it’s a good idea to know what’s in your credit report. Three credit bureaus track credit history (Equifax Canada, TransUnion Canada and Northern Credit Bureaus), and each may contain different information. But only Equifax and TransUnion can give you a credit score, which ranges from 300 to 900 and can make a big difference to your bottom line. If your score is high (above 650 or so) you’ll probably qualify for a loan at prime, but a lower score might saddle you with prime plus several percent. That can add up to thousands of dollars over the course of a loan.
Call, write or email the credit bureaus to request a copy of your credit report and score. You can get your report free in the mail or buy both for about $20 online. You also have the right to contest a negative report; mistakes do occur. But the only way to clear a bad report that’s accurate is to pay your bills on time consistently: Most bad credit information disappears after six years.
Pay It Off
There’s no miracle cure for getting out of debt. It requires spending less than you earn, and it can take several years. “You must be methodical and consistent,” says author Ellen Roseman. “You have to have a plan.” Experts recognize some basic steps:
• Get organized. Keep track of every penny you spend and see where you can cut back. Then target that freed-up money for debt. Balance your chequebook each month, and pay bills on time to avoid late fees.
• Put your credit cards on ice—literally. “Fill a plastic container with water, stick your credit cards in it, and put it in the freezer,” says bankruptcy lawyer Stanley Kershman. “You won’t be able to use them on impulse buys because it takes hours to thaw them out—and if you microwave them, you destroy all the data.”
• Negotiate with creditors. Call your credit-card company and request a lower interest rate. If they refuse, find a better deal, then tell your current card company you’re going to transfer your debt. You might find your rate drops quickly. This only works if you’re a borrower who never defaults on payments.
• Get to work! Kershman suggests listing all your cards, what’s owed on each, the interest rate and minimum monthly payment. Make the minimum payments, and use any extra money to pay down the card with the highest interest. Once it’s paid off, move on to the next-highest-interest card until they’re all paid off. If possible, double monthly payments—and never charge another thing. Can’t do that? Work a second job until the debt is paid off.
* Not their real names.