Debt Relief Experts
Credit Card Debt is a Problem For A Lot of Canadians
In recent years, credit card debt has ballooned in Canada. In our practice, 93% of all our clients owe some form of money on credit cards, and the average outstanding balance is more than $25,000. It is possible to pay off credit card debt on your own. The question is, can you?
- Paying only the minimum balance, or interest only payments, will not reduce your credit card debt.
- Maxing out your credit card balances will lower your credit score.
- If you are falling behind, making late payments or worse, missing payments, your credit score is already damaged.
If your debts are too large to tackle on your own, consider booking a free debt assessment to determine if consolidating your credit card debt will be enough, or if you need some form of debt relief.
How Credit Card Debt Becomes Unmanageable
Credit card debt is one of the most challenging debts we see every day. People get caught in a cycle of credit limit increases, new credit card offers and using credit card debt to pay for living expenses.
Unexpected life events such as job loss, medical emergencies and other financial hardships can lead to missed credit card payments or increased reliance on credit, making the situation even worse. The result is often a cycle of debt that becomes harder to break as credit card bills pile up, and the debt becomes increasingly unmanageable.
If you are looking for credit card debt relief, you have several options that can help you pay off your debt. Each differs in terms of monthly payments and the impact they will have on your credit report. Some will have you out of debt sooner, others will take a little longer. Which will work for you depends on your situation. Here are a few credit card debt relief options to consider:
Tackle Credit Card Debt on Your Own
Many are relieved to know that they can work their way out of credit card debt on their own. The key is to have a well-thought-out debt reduction plan; starting with the development of a household budget. You need to be strict with yourself to find ways to cut back on your spending and funnel the savings into debt repayment.
You can help pay off your debts sooner by negotiating better terms with your credit card providers. If your payments are current and your credit score is not too low, they may work with you to find a lower-interest debt option. A lower interest rate means more of your monthly payments are applied to the balance owing, ultimately saving you money.
Another option to consider is a balance transfer to a lower-interest credit card. Balance transfers aren’t without risk, however. Balance transfers often come with annual fees or cost a percentage of the balance transfer, usually between 3-5%. In addition to added fees, balance transfers aren’t usually accompanied by any sort of grace period, so interest begins racking up right away. Like any credit card, opening a card for balance transfer can negatively impact your credit score.
Paying off your debts on your own has the least impact on your credit score in the long run. The first step is to catch up on any payment arrears; constantly missing payments or paying less than your minimum payment will do more harm to your credit. Once you do catch up, continue to apply as much as you can each and every month to paying down your credit card debt.
Consolidating Credit Card Debt
Consolidating credit card debt can help lower your monthly payments, but you will still have to pay off your original balances in full. How much interest you pay will depend on which strategy you choose:
Debt Consolidation Loans
Credit card debt consolidation loans allow you to combine multiple credit card bills into one payment, often with a lower interest rate. However, it’s important to consider the pros and cons, as consolidation can extend the repayment period, potentially increasing the total amount paid over time.
Another option is negotiating directly with your credit card company for lower interest rates or more manageable payment terms. If your payments are current and your credit score is solid, the company may offer better terms to help you avoid default. Successfully managing and paying off debt on your own can improve your credit score and prevent issues with debt collectors.
If you have home equity or other assets, you might consolidate credit card debts through a home equity loan or a secured debt consolidation loan. However, borrowing against your home is risky—missing payments could lead to foreclosure or loss of the collateral. Additionally, these loans may come with high interest rates.
A debt management plan is a viable solution if your credit card balances are manageable. These plans typically take three to five years to repay, depending on the size of your debt.
Debt Management Plans
If self-management isn’t working, another option is a debt management plan (DMP), which a non-profit credit counseling agency typically administers. They negotiate with your creditors to lower interest rates and create a repayment plan that fits your budget.
A notice that you are participating in a debt repayment program will appear on your credit report and will remain there for two years after your payments are successfully completed. It is important to know that while a debt management plan will help you deal with small credit card debts, a debt management program will not deal with other forms of unsecured debt including tax debts, student loans and payday loans. Also, if you can’t afford to pay back your debt in full, it will not provide you with the debt relief you need.
Settle Your Debts With A Consumer Proposal
A Licensed Insolvency Trustee can help you explore your options. A consumer proposal, unlike a DMP, is a legal form of debt settlement filed with a trustee in bankruptcy. Because it is a debt relief program governed under the Bankruptcy & Insolvency Act you gain several added features:
- All wage garnishments, collection calls and other creditor actions are automatically stopped as part of the process.
- In addition to interest relief, a consumer proposal allows you to repay back less than the amount you owe. This makes a consumer proposal, in many cases, less costly than a debt management plan.
- It deals with all of your debts. No matter the size of your credit card debt or what type of unsecured debts you owe, if they are dischargeable in a bankruptcy, they are dischargeable by filing a consumer proposal.
For many, a consumer proposal is the most financially beneficial form of debt relief. You can negotiate payments that you can afford, and you will be debt free in three to five years. Because you settled your debts, a note will appear on your credit report that you are in a consumer proposal and will remain on your report for three years after you complete your payments. You will notice that we did not include using an agency or debt settlement company as a form of credit card debt relief. This is because many agencies provide questionable services in exchange for high fees. We have all too often had individuals contact our office after working with a ‘debt relief agency’, only to find out that the program did not help and they are now worse off than when they started.
If, And Only If Necessary, File For Bankruptcy
Bankruptcy is an option if your debts are so overwhelming that you can’t afford to pay them back, and you can’t make an arrangement with your creditors through a consumer proposal. While it may seem like an extreme solution, doing nothing and continuing to struggle with credit card debts for years is not an option either. Although a bankruptcy will appear on your credit report for six years after your bankruptcy is completed, you need to compare the choice to your alternative. Filing bankruptcy can eliminate your credit card debt, and assuming this is your first bankruptcy, you may be discharged within nine months. You can then immediately begin to rebuild your creditworthiness because you are no longer balancing old debt payments. You need to compare the advantage of eliminating the debt payments sooner against continuing to struggle on your own. If you need help choosing between these debt relief options, give us a call. We offer a free, confidential consultation where we will discuss your situation and help you choose a solution that will work for you.
Credit Card Debt FAQs
How does credit card debt relief in Canada compare to making minimum payments?
Relying on minimum payments traps you in a cycle where your credit card debt barely decreases, as most of your payment covers interest. Credit card debt relief in Canada whether debt consolidation, a DMP or consumer proposal,, presents structured solutions that reduce or eliminates interest rates and help you pay off your debt faster.
How much credit card debt is too much?
Credit card debt becomes overwhelming when it affects your ability to make payments on time, forces you to rely on credit for basic expenses or when interest payments consume a significant portion of your income.
Can credit card debt be forgiven?
It is uncommon for credit card companies to forgive debt without some form of legal intervention. In Canada, a consumer proposal is a viable Ontario debt forgiveness program if you are facing extreme financial hardship and cannot pay off your debt. This debt relief program can reduce or eliminate some or your debt.
Hoyes Michalos & Associates provides credit card debt relief solutions in the following locations
Other service areas
We offer the convenience of phone and video-conferencing only services for the following additional areas. Many people find it advantageous to begin the initial consultation and debt assessment over the phone or by video. If you decide to file, you can sign and complete your paperwork electronically. Credit counselling sessions can also be completed through video conferencing, which eliminates the need to miss work or schedule a time to attend the office.
