How to handle credit card debt in a credit crunch

How to handle credit card debtDespite increased financial pressures, there are still steps you can take to prevent your own credit meltdown. On 7 May 2009, Equifax Canada released a report that revealed "surprise" consumer insolvencies increased by more than 5 percent in February, compared with February 2008 numbers.

These are scary statistics to Equifax Canada since, according to its own definition of "surprise insolvency," the consumers affected are those who "paid the required payments on all of their credit products within 30 days of the payment due date one month prior to becoming insolvent." In fact, 71 percent of those who declared insolvency during the month of February were consumers considered in good standing with their credit card companies.

"But what they aren't telling you is that the minimum payment just keeps them off your back," says Lorayna Clement. "It barely makes a dent in the balance for those who are in over their heads."

Clement should know. She was in debt more than C$6,000 in combined credit card and line-of-credit debt two years ago. "When people receive their credit card statements, they have that 'minimum payment' they must pay. Paying only that amount doesn't help get you out of debt since the interest is twice that amount. It just snowballs."

Clement admits that she lived off her credit cards for several months, paying her regular monthly bills that way after she moved from Nova Scotia to Edmonton without a job in place. "What else am I supposed to do?" she asks. "I didn't qualify for UI [unemployment insurance] and was considered too 'workable' to be on welfare. I had to feed my kid."

With our current economic state, this situation seems to be much more common.

"I barely ever use my cards right now," says William McCaffrey. "I'm too afraid to be caught with huge credit card debt if I lose my job. I don't put anything on them I can't pay in one or two pay cheques. Then there's no interest accrued."

"In an uncertain economy, it is important to focus on protecting your financial reputation, which includes saving money, paying down debt and keeping tabs on your credit score and report," says Tom Reid, director of consumer solutions at TransUnion. "Consumers should be familiar with their credit reports to understand their finances and how lenders, creditors and potential employers are viewing them. Consumers should take a proactive role in managing and maintaining their credit to ensure they are prepared for unexpected events like losing their job, or racking up unforeseen debt."

So, how are Canadians handling credit card debt during the credit crunch?

"No way do I ever want to put myself in the position I was in two years ago," Clement says. "The best thing to do if you can't afford to pay for what you put on them is to cut them up or, at the very least, put them away until you can."

McCaffrey agrees. "I don't put anything on my cards unless I know I can pay them off pretty much right away. I've worked way too hard to build up my credit to have it fall apart just because I'm stupid with them. Technically, the stuff you put on them isn't yours anyway until your statement says zero. People, especially young kids,  suckered into getting high-limit, high-interest rate cards need to remember that."

Here are some basic tips both Clement and McCaffrey felt most consumers with credit card debt will find most useful:

  • If you have more than one card with balances, pay higher payments on the card with the lowest amount owing, but with the highest interest.
  • As you pay off one card or other form of credit, cancel it. One only needs one or two forms of credit at the most.
  • Cancel cards with annual fees and higher interest rates.
Reid provides some additional tips for managing your finances during these tough economic times:

Watch your spending. Stick to a strict budget within your means to ensure you have a safety net if something happens to your job.

Set aside some money. Aim to save enough to meet your living expenses for no less than six months.

Live within your means. You should make paying down debt a priority while you have the money to do it. The lower the balances you keep on credit cards, the better. Aim for carrying balances that are less than 35 percent of a card's limit.

Don't be late with payments. One of the most important contributors to a strong credit history is paying your bills on time. Regardless of your situation, you should try to pay at least the minimum amount due on time each month.

Article written by Lily Wolf.

Updated July 10, 2009

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