The Marketing Of Consumer Debt. Avoid The Traps.

Posted in Money Tips
Posted by Ted Michalos, BA, CPA - LIT

marketing-consumer-credit

Who’d have thought that there would be companies fighting over who gets to help people in dire financial situations, but there are.  In fact, it is big, BIG business.

There are people that specialize in every step of the process and many of them are looking to fleece an unwary public. If you've received one of those famous robocalls from a company implying they are calling about your current credit card only to offer a lower interest rate card, you will understand that the selling of credit has become quite aggressive.

The Debt Trap

Consider this: as you miss payments because you can’t keep up with your credit card debt, your credit worthiness deteriorates. Instead of reducing the cost of borrowing by lowering interest rates so you can afford to pay back your loan, lenders do the exact opposite – they increase your rates.  The more you borrow the more expensive the borrowing becomes and the more difficult it becomes to make the required payments.  Those companies offer you a 'lower rate' only do so to get you in the door.  You can easily see your rate increased dramatically for just one missed or late payment, accidental or not.

It’s Debt Not Credit

As offensive as that is, it is not the worst of it.  The thing that really gets my blood up is the fact that no one markets debt.  They market credit.  Credit is a good thing.  You are congratulated on being awarded more credit. Your standing in the community is directly reflected in your ability to access credit. We promote the use of credit by tying it to fancy reward points and programs.

Of course once you use credit it becomes debt.  Debt is bad and to be avoided.  If you have debt it must be repaid to maintain your access to good credit.

Limit Your Access To Credit

In my opinion and based on my years of experience in the personal insolvency industry, people require a very limited set of credit tools in order to live in our society.  Everyone needs some form of credit or charge card if you want to purchase things in the main stream, especially in today’s on-line economy.  So that means everyone needs a credit card.  However you don’t need three or four or five cards (I had one client come and see me with 29 credit cards!).  The more cards you have the greater the risk you will use all of them at once and not be able to pay them off each month.

Your personal limit should be set (and kept) at a level you can comfortably repay.  The credit card companies will keep raising your limit to the point you demonstrate you can handle the minimum payments.  It is in their best interest to do so.  It is in your best interest to restrict how much you can spend on a credit card.  Credit cards should be used as a substitute for carrying cash, not a substitute for borrowing.

With your one credit card you might consider applying for a personal line of credit.  Again, you don’t need two or three or more.  One should suffice.  The line of credit is for those big ticket items that may require more than one month to repay.  A car repair is a good example, or new furniture (although saving up front for these is better).  Lines of credit generally have much lower interest rates so more of your monthly payment goes towards paying down the debt. Don't get caught into the trap however of making interest only payments for too long. If you use your line of credit for an emergency, make a plan to pay it off.

The only times you should consider credit or debt is for really big ticket items – a mortgage on a house, a car loan or lease.

Lenders will try and get you to spend every dollar that you earn.  They will “sell you” on the idea of travel cards, reward cards, cash back cards and loans – all of these things cost money and increase the risk that at some point in your life they will get out of hand.

  • You don’t need a platinum card.
  • You don’t need an air travel card.
  • You don’t need a vacation loan.
  • You don’t need to change cars every other year.
  • You don’t need – well you get the idea.

Avoid these traps, and your debts won’t get out of control.

About Ted Michalos

Ted is our co-founder and is a Chartered Professional Accountant, certified Insolvency Counsellor, Licensed Insolvency Trustee, Consumer Proposal Administrator, and the President of Hoyes, Michalos & Associates Inc. Ted meets personally with clients in our Guelph office.

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