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I pay off both my credit cards every month so when selecting a card, I don’t pay any attention to the interest rates charged on outstanding balances. But just for fun, I pulled out my July/August MBNA statement and reviewed the terms of payment.
The interest charges on amounts owing each month is 19.99 per cent. My balance was $3,489.29 and if I didn’t use the card going forward and paid only the monthly minimum of $34, it would take me 20 years and 11 months to pay it off. The total amount paid over that period would be $8,534 – over double my original spend.
With that kind of math, it’s not surprising that people who spend the maximum on multiple cards often find themselves in trouble. If you are in this situation, The Financial Consumer Agency of Canada has the following tips to help you get your finances under control:
1. Stop using credit: If you continue to spend beyond your means, it will be difficult to realize your goal of being debt-free.
2. Find ways to cut spending: Review your budget and list ways you can cut down on your spending. Make coffee at home instead of buying it. Consider selling some of your assets or taking on additional work to bring in extra money.
3. Pay at least the minimum by the due date: If you do not, you will harm your credit history and score. Paying of the debts with the highest interest rate first will reduce the amounts you pay in interest and reduce your debt more quickly.
4. Contact your creditors: You may be able to negotiate a lower interest rate or a payment plan that works better for you.
5. Set a reasonable repayment time: If your time frame is too long, debt fatigue will set in and you will lose focus. If your time frame is too short or unrealistic, your chance of success decreases and so does your motivation.
6. Once a debt is paid, close that account: You do not need the temptation of that available credit to pull you back into debt. You will need to keep some credit and loan products in order to rebuild your credit, but only keep what you need and can manage responsibly.
7. Commit to a payment schedule: Write post-dated cheques in order to keep to the payment plan and to show them you are committed to repaying them.
8. If your debt has gone to collection: See Tips for dealing with a debt collector.
My favourite way to avoid unmanageable credit card bills is to use cash. On our recent trip to Seattle we took cash and only used our credit cards for a few items. It is nice to know that by doing so we have avoided unpleasant surprises on our next bill, particularly with the holiday season only weeks away.