If you owe $5,000 on a credit card your minimum payment is $100. In all likelihood you can afford to pay more than that in order to reduce your balance. Owe $25,000 in credit card debt and your minimum credit card payment is $500. Now you’re reaching the territory where all you can afford is the minimum payment every month and you don’t see any chance that you are going to be able to pay off your credit card balance any time soon. That’s the position a Brantford client I meet with recently was faced with. Here’s his story and how we helped him find a better future.
The Path Into Debt
Dave (not his real name) is single, in his early 30’s and works for a local manufacturing company. He’s lucky because while his pay is modest it’s fairly steady and he can even earn a little extra every once in a while when some overtime is available.
The problem is Dave’s debt started in his early twenties. He admits to not knowing much at that time about money management. Whenever he felt compelled to buy something, he confessed he didn’t really think about how he was going to pay for it. As long as he was keeping up with his credit card payments, he didn’t think about the impact every new purchase made on the bottom balance. And no way was he thinking about all the interest he was paying every month. By convincing himself he could easily handle the minimum payments on the credit card, Dave eventually racked up $25,000 in credit card debt.
Dave fell victim to the three traps of paying with credit cards:
- When you buy something on impulse you don’t feel like you are using real money so spending increases.
- When the bill arrives it still doesn’t seem urgent. As long as you can make a payment and retain access to your credit you feel secure.
- Making minimum payments doesn’t reduce the balance and new purchases mean your balances rise even more. As your balance grows, so to do your minimum payments making it even harder to gain control over the balance.
Detoured By Debt Payments
Fast forward ten years. Dave has been dating his friend Nikki for a couple of years now and they’ve been talking about what the future may hold for them as a couple. Thinking he’d like to be a part of Nikki’s future Dave became increasingly concerned that his debt may get in the way. First thing he did was cut back on his spending, enough that he wasn’t growing his balances any more.
Unfortunately, despite his best attempts, Dave couldn’t really afford to pay much more than his minimum payment. A hundred here and there maybe, but despite his best efforts he found that his balance owing barely seemed to have dropped any in the last two years. He noticed recently that on his credit card statements it indicated that if all he were to do was continue paying his minimum payment, it would take 27 years to pay off. By continuing to struggle he worried that he’d never be able to put any money away and continue servicing his debt. So no chance of paying for a wedding, no chance of saving for a down payment for a home for Nikki & himself. Everything was going towards interest to service his $25,000 in credit card debt.
At this stage Dave felt the consequences of carrying high credit card balances:
- Even with no additional charges, Dave’s interest costs where so high he didn’t make enough to be able to pay down his balances.
- Tapped out credit card balances means you’re credit capacity is overextended which has an impact on your ability to gain additional credit.
Bankruptcy was his Road Out of Debt
That’s when Dave called us. Dave suggested to me that he thought if he were to declare bankruptcy that he’d at least then have a chance to save up some cash in the long term.
Dave had no assets that he could sell to raise cash to pay off his debt and he didn’t want to have to ask his family, or Nikki, for help. He went to the bank for help and despite his credit score being respectable, they said that they were not willing to extend any further credit or help with the interest rate. Dave was a little baffled as he thought that with his “good” credit rating, the bank would have helped.
We sat down and talked options and in the end I agreed with Dave’s instincts: given that he had no assets a bankruptcy would not impact him in that respect. His income was steady, but not so high that he would have to pay extra surplus income, so a bankruptcy was a good choice for Dave. Since this was his first bankruptcy, Dave would be finished within 9 months.
Dave was also pleasantly surprised to find that his bankruptcy payments were going to be less than what his minimum credit card payments had been before. He thought he’d start putting the difference in the bank right away to buy an engagement ring for Nikki. He knew he wouldn’t be able to rely on credit for the purchase but in a way was looking forward to this being his first challenge to learn to set money aside before buying.
Who knows what the future will hold for Dave and Nikki, but Dave feels a lot more confident now that he’s taken control of his debt and feels like he now has a firm plan in place for his financial future.