Pay now or pay more on credit

The Peterborough Examiner - - Business - IAN BICKIS

The Bank of Canada’s lat­est rate in­crease has raised the cost of bor­row­ing,, as well as the im­por­tance of pay­ing off debts.

Credit cards of­ten carry in­ter­est rates in the dou­ble dig­its, some of the most crip­pling in the debt world.

So any­one car­ry­ing a bal­ance on one should make it their top pri­or­ity to pay off — even if the big banks’ de­ci­sion to raise their prime rates doesn’t di­rectly im­pact credit card rates, said Credit Coun­selling So­ci­ety pres­i­dent Scott Han­nah.

“If a per­son is reg­u­larly car­ry­ing a bal­ance on their credit card, that’s a prob­lem,” he said.

About 44 per cent of Cana­di­ans are $200 a month or less away from fi­nan­cial in­sol­vency, ac­cord­ing to ac­count­ing firm MNP.

Credit agency Tran­sUnion said ear­lier this month that av­er­age non-mort­gage debt stood at $29,312 per per­son, in­clud­ing an av­er­age credit card bal­ance of $4,154. But about half of Cana­di­ans pay off their credit cards each month, so the bur­den is ac­tu­ally much higher for those who don’t.

Tack­ling debt can seem daunt­ing, and many con­sumers choose to ig­nore the prob­lem by pay­ing only the monthly min­i­mum, but an hon­est fi­nan­cial self-as­sess­ment and some plan­ning will pay div­i­dends in the long run, said Han­nah.

The first step in tak­ing on messy fi­nances is to draw up a work­able bud­get, with rea­son­able spend­ing cuts, that’s not too re­stric­tive, he said.

“If your morn­ing latte is a must-have, keep it, and look for other ar­eas in your bud­get to scale back on.”

Long-term plan­ning and pa­said tience is im­por­tant so that you ac­tu­ally stick to a plan. That in­cludes putting money aside for ex­penses such as car re­pairs, so that they can be paid with cash, rather than us­ing a credit card and restart­ing the debt cy­cle, he said.

“It’s why so many peo­ple fail with their New Year’s res­o­lu­tion to get out of debt real fast. It doesn’t work.”

Re­duc­ing credit card debt also re­quires a per­sonal strat­egy re­gard­ing how they’re go­ing to be paid off, es­pe­cially since the av­er­age client has four or five credit cards, but Han­nah thinks it’s im­por­tant to pick the card with the small­est bal­ance and pay that off first.

“Get­ting that win under your belt is re­ally mo­ti­vat­ing.”

Con­sol­i­da­tion loans are an op­tion as they will pro­vide a sin­gle lower rate of in­ter­est, but Han­nah rec­om­mends wait­ing un­til you es­tab­lish a track record of stick­ing with a bud­get, which could take months or years.

Too many peo­ple get a con­sol­i­dated loan only to dip into credit cards be­fore it’s paid off, due to an emer­gency or per­ceived need, so the track record is im­por­tant, Han­nah.

“It takes a while if you’ve never done it be­fore, to use a bud­get. You’re go­ing to make mis­takes,” he added.

Es­tab­lish­ing a proven bud­get and pay­ment plan could also make it eas­ier to get that con­sol­i­dated loan once the ground­work has been laid.

On­line loans from less es­tab­lished lenders may ap­pear to of­fer a seem­ingly cheaper rate, but Han­nah warns that con­sumers should care­fully re­view the terms. Ac­tual rates can be much higher than those ad­ver­tised, and can carry hefty penal­ties for things like late pay­ments, so bor­row­ers should be ex­tra wary of the terms.

Trans­fer­ring bal­ances to a low-in­ter­est credit card can cut in­ter­est pay­ments, but do­ing so of­ten trig­gers a bal­ance trans­fer charge. The ap­proach also still re­lies on credit cards, which Han­nah says peo­ple need to give up al­to­gether un­til they get out of debt.

Stick­ing to a bud­get also means check­ing in reg­u­larly on progress, see­ing those bal­ances clock down and hav­ing pa­tience with the process, said Han­nah.

ELISE AMENDOLA THE AS­SO­CI­ATED PRESS

Only about half of Cana­di­ans pay off their credit cards each month.

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