End the vicious cycle of using your card to make ends meet
It starts off as a one-off: you make a payment for one credit card using another credit card because you're in a pinch. Then you use your credit card to withdraw cash to cover rent or pay for utilities, until suddenly, you're living off of credit and anxiously waiting until payday.
It's a scary situation to be in, and it'll land you in hot water with your creditors fast, says Scott Hannah, president of the national Credit Counselling Society.
"You're hiding your financial situation with a credit card," he says. "We see this all the time, people come to us with seven cards maxed out and when you ask them why, they don't understand what caused the problem."
It may be a predicament for many Canadians: nearly four in 10 homeowners didn't have enough money in the bank to cover household expenses at least once in 2015, according to a Manulife Bank of Canada survey. The survey found 33 per cent of those caught short turned to a line of credit to bridge the gap, while another 32 per cent carried a balance on a high-interest credit card to make ends meet. Only 23 per cent used savings.
"When you're using credit as a tool to provide more cash flow, you need to understand this money is not yours," says Tom Feigs, a Calgary-based expert with Money Coaches Canada. "It's a temporary solution and it can end up being a vicious cycle to keep your lifestyle higher up than it should be. This is a habit that needs to be broken."
Feigs and Hannah provide a step-by-step guide to bail you out:
1. Switch to an emergency
You need to stop hemorrhaging money from your bank account and credit cards.
"Seriously reduce" your lifestyle spending, Feigs says. That means scaling back on miscellaneous spending, such as eating out and entertainment. You also need to scrap the use of a second car or even your primary vehicle if there are cheaper means of transportation.
"When people call me, it's not that they necessarily wanted to be deep in debt, they just didn't fully pay attention to the cash flow and allowed things to spiral out of control," Feigs says.
Get on a bare-bones budget and stick to it for about three months, Feigs suggests. Ideally, it'll free up money to put toward your debt while you figure out a long-term solution.
"You can't change things overnight," Hannah says. "It might take a month or two to figure out where the problems are, sort them out, and get to a stage where you can stop relying on your credit card."
2. Get professional help.
The type of help you seek can be varied, and you may want to talk to multiple experts to figure out your options, says Feigs. For instance, a debt counsellor or money coach will help you draw up a new budget after crunching the numbers for your income, outstanding debt and expenses.
Debt counselling agencies will work with your creditors to help broker a debt repayment plan so you make a single monthly payment with a lower interest rate. That payment is then divvied up among all of your creditors, Hannah says.
If you have your hands in a lot of accounts and assets, a financial planner could help you figure out if you can sell your stocks and bonds or transfer funds.
In some cases, a bankruptcy trustee could help you look into a consumer proposal or even bankruptcy so that you can get a fresh start, Feigs says. "Trustees can help you negotiate with banks and creditors to forgive some of the debt and pay a court ordered monthly amount."
You can also decide if you want to consolidate your debt, move it onto a lower interest credit card or transfer it onto a single line of credit.
3. Create, and adhere to, a new
This is often the hardest step. Before, your paycheque wasn't enough to cover all of your living costs so you have to make some downgrades while you're on your bare-bones budget, Hannah says. You may have to sell your car and get a bus pass, swap your daily lunches out for brownbag sandwiches and move from your townhouse to a cheaper apartment. However, just being able to cover your basic costs is not enough. You need to have a new, long-term budget.
"What caused this predicament is not understanding monthly and seasonal expenses, so you have to go back to the drawing board and recognize how much you were spending on housing, groceries, paying bills and other costs," Hannah says.
Maybe you'll find you're splurging too much on entertainment and gadgets, or that you don't adequately plan for holidays or summer activities. Additionally, your budget must now include your debt repayments. You'll either have to further cut back on spending, earn more money or both.
After you form a new budget that addresses your debt repayment, you have to stick to it, Hannah says.
4. Tuck away the plastic.
You may not get to close your credit cards if there's still outstanding debt on them, but it's best to put them away, at least until you get your debt under control and become accustomed to your new budget.
"Take them out of your wallet and put them somewhere safe, like a safe deposit box, or a block of ice," Hannah says. "Removing them from your repertoire of payment tools gets rid of the temptation."
You can try a cash diet, or just rely on your debit card. Eventually, it may be safe to use credit again, after you've learned -- and paid for -- your lesson about using them unwisely.
5. Make use of external
resources if you need them.
Some clients Hannah meets simply can't make ends meet without the help of social services, such as subsidized housing, or the use of a food bank, for example. Don't be ashamed or afraid of using these services -- as long as you are not abusing them, that is what they are there for.
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