Credit control

Question

I read with horror your post about on the family with $60,000 in credit card debt. It freaked me out because I really don’t want to head in that direction. I have about $10,000 owing across 12 credit cards. Where do I start?

Answer

Here’s the bad news: You are headed in that direction. Unless you do something to alter your course your debts will continue to gather momentum in that direction—and that is scary. A $60,000 credit card debt most often starts with a $10,000 one that quickly gets out of control.

Let me show you what I mean. Let’s say you have a credit card charging 18% interest, which isn’t that unusual. (To keep things simple, we’ll pretend you only have one credit card.) Now let’s say you decide you were only going to make the minimum payment on that $10,000 balance. In this scenario, it would take more than 25 years to pay it off, and cost you $14,000 in interest—and that’s on top of your original $10,000 debt.

Even if you consistently put a modest $250 against your credit card balance every month it would still take five years to get it down to zero. And even with this more disciplined approach you’d end up paying more than $5,000 in interest.

This, of course, assumes you don’t add on any new charges to you card. But who are we really trying to kid here. If you’ve already racked up that much debt on your cards then spending on credit has become way of life—and that’s how your $10,000 debt can turn into a horrifying $60,000 before you know it.

Now here’s the good news: You’ve identified you have a problem and are focused on finding a solution. Hooray. Here are the basic steps I would recommend you take, with thanks to the folks at Credit Canada for inspiration.

1. Write down all your debt details:

A simple spreadsheet is ideal, but a Swiss Chalet napkin will work too. Write down:

Name of the card
Outstanding balance
Minimum payment
Payment due date
Interest rate

Then—make sure you’re sitting down for this next part—calculate the total outstanding balance at the bottom of the page.

2. Stop using your credit cards

One of the most effective ways to kick your credit card addiction is to take them out of your wallet and get into the habit of paying for everything with cash. It is totally annoying, but it works in large part because it reintroduces the “pain” of spending that credit cards anesthetize. You have 12 credit cards— put 11 of them somewhere that would be very tough to access—perhaps a locked steel box that you send by courier to Narnia. Then keep the remaining one frozen in a block of ice in your freezer.

3. Free up cash

You basically have two ways to free up cash for debt repayment. You can increase your income or cut spending. Sure, not using your cards will help, but it won’t be enough. You’ll need other creative ways to increase the gap between what you have coming in and going out.

4. Make all minimum payments on time

On time. As in, not one day late. Ever. From here on forward. For simplicity, see if you can get all the dates to line up to the day after your payday, and set up automatic withdrawals from your bank account to pay the minimum on each card every month. If this is too precarious, put the dates in your calendar so you don’t incur additional costs by accidentally being late.

5. Use all available cash to focus on one card

Let’s say you’re able to find $300 a month over and above your minimum payments. There are two options in terms of how you focus that money.

• High interest rate: If you have one card at 28% and the others range from 14% to 25%, the best approach from a mathematical perspective is to pay the highest interest rate first. This will give you the biggest bang for your buck.

• “Debt snowball”: The second option is to focus on the one with the lowest balance. Some people find there is a big psychological boost from quickly reducing the number of cards with balances on them.

6. Take your “patience pills”

I have about as much patience as my two-year-old does when sitting in front of a chocolate brownie. And I have been told many times, in many circumstances, to take my imaginary patience pills. I recommend you do the same. Debt repayment takes time and it isn’t fun, but it will work if you stick with it.

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Please send your money questions to Bruce Sellery at [email protected].

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.