New Year’s money res­o­lu­tions: how to break the re­volv­ing debt cy­cle

The Daily Press (Timmins) - - SPORTS -

De­spite mak­ing a bud­get, and check­ing it twice, ex­perts say many Cana­di­ans still over­spent this hol­i­day sea­son, leav­ing them in even more debt head­ing into the new year. Cana­di­ans re­port­edl y planned t o s pend nearly $600 on hol­i­day shop­ping, with more than half of re­spon­dents ex­pect­ing to go over bud­get.

Un­for­tu­nately, bill pay­ments don’t take hol­i­days, so tak­ing on ex­tra debt can l eave many peo­ple f eel­ing stretched when the par­ties are over and re­al­ity sets in. Ac­cord­ing to a re­cent poll by CIBC, nearly 30 per cent of Cana­di­ans sur­veyed said pay­ing down debt is their top fi­nan­cial goal in 2017. Of those fo­cus­ing on debt re­pay­ment, the ma­jor­ity ( 76 per cent) are most con­cerned with pay­ing their credit card and line of credit debts. These types of debt are what are con­sid­ered re­volv­ing debt.

If you’re part of this group, you prob­a­bly had ever y in­ten­tion of keeping your hol­i­day bud­get in check. You made a list, checked it twice, and even scaled back your other spend­ing lead­ing up to De­cem­ber. But that ex­tra space on your card, plus the temp­ta­tion of all those hol­i­day deals, got the best of you.

Here are my tips for get­ting in con­trol of your re­volv­ing debt, so you can be debt-free faster:

1 . Und e r s t a n d why re­volv­ing credit doesn’t work for many peo­ple The thing about re­volv­ing credit is that it makes it easy and con­ve­nient for you to stay in debt. Your thrifty hol­i­day spend­ing plans eas­ily fall by the way­side when paired with the psy­cho­log­i­cal high of buy­ing the lat­est tech gad­get, pair of shoes, what­ever it may be. It doesn’t help that we’re in­un­dated with a spike in ad­ver­tis­ing and sales en­cour­ag­ing us to spend dur­ing the hol­i­days. The ex­tra room on your credit card can start look­ing ex­tra ap­peal­ing.

Re­volv­ing credit comes in the form of a credit card or line of credit that lets you im­me­di­ately re-bor­row what you paid back on prin­ci­pal. And many re­volv­ing credit prod­ucts al­low you to pay back only the in­ter­est. It’s a ma­jor rea­son why so many peo­ple find them­selves stuck in what feels like an end­less cy­cle of debt.

This type of debt en­cour­ages over­spend­ing or max­ing out your limit re­gard­less of whether you have a five per cent or 30 per cent in­ter­est rate. In fact, 46 per cent of Cana­di­ans carry a monthly credit card bal­ance.

Miss­ing credit card pay­ments, or even max­ing out your credit card, will have a neg­a­tive im­pact on your credit score, which can have neg­a­tive reper­cus­sions down the road. Your credit score mat­ters t o l en­ders when mak­ing a de­ci­sion on things l i ke ap­ply­ing f or a mort­gage, and some em­ploy­ers even check your credit score be­fore of­fer­ing you a job.

2. Con­sider an in­stall­ment loan to con­sol­i­date your re­volv­ing debt Un­like re­volv­ing credit, an in­stall­ment l oan has a spe­cific term and re­quires you to pay back in­ter­est and prin­ci­pal in ev­ery pay­ment, which means you have a set dead­line for pay­ing it off and get­ting out of debt. Many peo­ple only fo­cus on in­ter­est rates but they may be sur­prised to find that pay­ing off an in­stall­ment l oan ( even with a higher in­ter­est rate) could al­low them to pay less in­ter­est.

It’s im­por­tant to con­sider the type of credit prod­uct and the to­tal cost of bor­row­ing, rather than the in­ter­est rate alone.

For ex­am­ple: Say you have a credit card with $10,000 on it at a 19.9 per cent in­ter­est rate, and you’re only mak­ing the two per cent min­i­mum pay­ment each month. At that rate, it’ll take you 83 years to pay it com­pletely off.

Even if you’re able to chip away and pay it off over the year, if you’ve been stuck in the re­volv­ing debt cy­cle in the past it’s very likely you could find your­self tempted to spend again once you see that num­ber go­ing down.

On the other hand, if you were to con­sol­i­date that same $10,000 debt by pay­ing it off with an in­stall­ment loan, you could be out of debt in as lit­tle as four years.*

3. Stick to a pay­ment sched­ule Once you’ve con­sol­i­dated re­volv­ing debt with an in­stall­ment loan, it’s im­por­tant to stick to your pay­ment sched­ule. Some dig­i­tal fi­nan­cial com­pa­nies, l i ke Mogo, will send you alerts with reg­u­lar re­minders about pay­ments to help you stay on track.

If you’ve de­cided to con­sol­i­date your credit card debt, don’t get rid of the card or close the ac­count, though. Clos­ing a card or leav­ing it in­ac­tive can neg­a­tively af­fect your credit score. In­stead, use my Net­flix and Chill tip: Link your credit card to your Net­flix ac­count for your $9.99 monthly sub­scrip­tion charge, then set up an automated pay­ment from your bank ac­count to en­sure it’s paid off ev­ery month. Lastly, throw the card in the freezer to give it some much­needed chill time.

Pay­ing down a bal­ance of re­volv­ing debt and trans­fer­ring it to an in­stall­ment loan will also help your uti­liza­tion ra­tio as the credit score weighs more on re­volv­ing uti­liza­tion than in­stall­ments. Your uti­liza­tion ra­tio is your level of in­debt­ed­ness, or how much of your to­tal avail­able credit you’re us­ing. For ex­am­ple, if your credit card l i mi t i s $ 1,000 and your bal­ance is $1,000, your uti­liza­tion ra­tio is 100 per cent — and this not good in the eyes of the credit bureau. You al­ways want to keep your uti­liza­tion ra­tio un­der 70 per cent.

Mogo Fi­nance of­fers per­sonal loans with rates for Cana­di­ans with dif­fer­ent credit back­grounds, as well as a free credit score with free monthly up­dates. Learn more at mogo.ca. *Based on a 5.9% in­ter­est rate

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