Tag Archives: credit card balances

We’re Going Broke At a Slower Pace

Newly released averages from TransUnion, one of the credit bureaus shows what we talked about recently. We’re increasing our borrowing, but at a slower pace. Great. Kind of like someone on a diet just having three pieces of cake, instead of four. We’re still growing our debts which are already significantly too high.

On average we owe $3,600 on our credit cards. But remember that about half of Canadians pay their balance in full – hurray. So the rest of us owe over $7,200 – and that should be a concern.

Lines of credit are now over $35,000 on average. But think back not that many years ago. We used to get a personal loan if we wanted to borrow $10,000 for renovations or $15,000 for a motorcycle. Well, making a loan costs the bank about $200 to $300 in setups, credit reports, etc. So they moved us to lines of credit. Now a loan had a three, four, or five-year term of fixed payments. Make all the payments and you were done with this debt. Yet, a line of credit makes us the loans officer. We can pay as little as interest only (newsflash: Most do) or as much as we want. We were sold on convenience and hardly anybody gets an actual loan these days, with the exception of vehicles. Now we can pay as little as we want and the banks don’t have to keep making new loans.

The downside is that now, on average, we take more than a decade to pay off our lines of credit. That’s assuming we don’t just roll them into a mortgage refinance. It used to be four years of loan interest, now it’s a decade or more of payments. Great for the lenders, very bad for us. Without much of a rise in incomes and all the other monthly payments, it’s just natural to fall back on the least amount we can pay – and we do.

Banks really do have the brightest marketing minds in the country. They’re so great at selling us something that they make a profit on and helping us with our going-broke plans.

You Can’t Borrow Your Way to Prosperity…Honest!

This week, Finance Minister Flaherty announced that his department is done with the tweaking and tightening of lending regulations. Well, there’s only so much a government can do for our own good.

Mortgage refinancing is now capped at 85% and you can no longer get mortgage insurance on interest-only lines of credit secured by your home. Now, I guess, it’s up to us – as it has been all along.

While Statistics Canada just released figures that show our net worth is increasing to an average of $184,700 – our debts are climbing way faster. We now owe $1.55 trillion dollars, of which $45,000 is consumer debt, excluding mortgages.

News flash: You cannot borrow your way to prosperity. The majority of people have been trying that and we’re broke. How about trying to get to be debt-free, instead?

We freak out when gas is up 20 cents a litre. Really? 40 litres x 20 cents is eight bucks. THAT is a panic? We get a $500 repair bill and we don’t have the money and it’s an emergency and big stress? Is that how we want live our financial life? When will you get to the ENOUGH scream in your head and choose not to want to live like this anymore?

How sad that we aren’t learning the lesson from the U.S. Their debt levels are dropping like a stone. Last year, they paid down massive averages on their credit cards. In Canada, the average credit card balance dropped $25 from last year, according to TransUnion. Americans are also refinancing in large numbers to get OUT of variable rate mortgages and into fixed ones. And tons are bringing cash to the refinancing, in to pay down their balances. In Canada, we keep taking larger and larger mortgages.

More than half of us now have lines of credit, almost all of which are on a variable interest rate. Rates are heading up – they have nowhere to go but up. So the banks have us exactly where they want us. Owing BIG balances on our lines of credit that we can’t just pay off in a month or two, and rates go up. That’s how banks maximize their profits and how we go broke in a hurry.

Denial IS a financial strategy. It’s just one that won’t work very long. I heard a new radio ad yesterday: Debt problems aren’t about overspending – they’re about emergencies. WHAT? No! Are you nuts? Debt problems are exactly about overspending. If you live on less than you earn, you have money left over.

There is another ad that has a lady saying that so and so credit helped her pay off all her debts. What? They handed you free money? Like $10 or $20,000? NO! You consolidated – you didn’t pay off a dime! And you took a bunch of short-term debt and stretched it to two decades or more. Plus, the majority of people who do that have their credit cards and lines of credit run up again in less than 24 months. It’s not a solution. It’s making the problem worse!

Almost two-thirds of families live paycheque to paycheque. You have to know where you money is going and get in control. You think you know, but you don’t – honest. Spend 15 minutes doing a written budget. Off that, I guarantee most people can find $200 or so in savings right there.

Get yourself a separate savings account and work on saving one week of your net income. That will put you ahead of 65% of people. Thirdly, list your debts smallest balance to largest and start attacking the smallest balance with every dollar you can find and just make minimum payments on all the rest. When that’s paid off, focus only on the next smallest, and so on. There’s a whole section in the It’s Your Money book that’ll walk you through it.

Buying Gas At 20 Cents a Gallon On Your Credit Card

Yes, you can get a 95 percent discount on the high price of gas just by using your credit card… sort of.

The vast majority of people are buried in credit card debt and monthly payments that make every lender rich, leave nothing for savings, and have the average family working most of the month just to pay bills. That’s surviving and not thriving, and it’s a horrible way to go through life.

As a result, every small increase in food prices, the cost of a gallon of gas, or any price increases become very painful. And what do most of us do right now? We charge our gas on credit cards.

The good news, next month we only have to pay around a five percent payment on our ballooning balances. So really, that $50 fill up hasn’t cost us anything when we charge it on our credit card since we’re not parting with any actual money at the time. Then, next month, when the credit card statement arrives, millions of people can only afford the minimum payment. That three to five percent payment puts $2.50 towards that fill up, tops. OK, it puts nothing towards it since almost the whole payment is getting sucked up by interest charges, but you understand the sick logic and financial nightmare so many people find themselves in.

Making minimum payments buys us the right to use the card for another month. Nothing more. It’s treading water and making a huge number of card issuers very very rich.

One of the most dangerous things we do in our financial lives is to charge consumable items to our credit cards. The restaurant charges, groceries and gas are used up and consumed way before the credit card statement even arrives! In other words – we have nothing to show for all those charges and that huge balance.

Could you set yourself a credit limit below which you won’t use your credit card? Can you decide to pay by cash or debit card for anything you’ll use up before the week is up? You’d be amazed at how quickly your debts will turn around when you no longer have those ten or twenty charges on your card, because they were paid in cash. Your statement will start looking weird with some payments on it, but very few new charges.

The price increases of gas and food impact us so heavily, and hits us so hard, because most of our money is already spent way before the next month even starts. In the big picture, if we were debt free, would we really notice that a fill up costs another $8 or $10? No, because most of our pay would be staying in our accounts! THAT is debt freedom. Until then, it hurts disproportionately, because we just don’t have that $8 or $10 left right now.

Right now, credit card companies have millions of families exactly were they want them: Carrying huge balances and no hope of paying much more than minimum payments. What’s in your wallet? A financial nightmare, waiting to explode – sooner or later. Or changing around that old American Express ad: Don’t leave home with it!

Getting Financially Fit For 2008

The good news: It’s a new year! The chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? It’s likely that you’re already broke! How is that? Well, we spend more than 120% of our disposable income, half of us have no savings and almost 70% of us don’t make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich, and there’s simply nothing left at the end of the month.

So when it comes to making some commitments about our debt, credit and all those bills, perhaps we should think small to make sure we set ourselves up for a win, and not a sure-fire let-down. But small doesn’t mean pointless, small just means some little steps you can actually keep, that’ll pay off big for 2008.

If you need additional motivation, remember that every $100 you don’t pay out making lenders rich is really about $150 or more. Why? Because you earn gross income, then all the deductions and tax come off your pay, and it’s only the net income that you have left over to pay bills.

So here are some more points, continuing our list from last week:

6. Set yourself a credit limit. If you won’t leave your credit cards at home for at least 90 days – pick a dollar figure below which you’ll pay by debit card or cash. Maybe $20 or $30 bucks – that’s it. But anything below that, you’ll spend with real money, instead of running up debts. It’ll become a great habit and will cut down your credit card balance in huge ways. After all, look at your statement. Almost all the charges are for pretty mickey mouse amounts that add up in huge debts – twenty bucks at a time.

7. Destroy your line of credit cheques and unhook the account from your bank card. Your line of credit was set up for emergencies and not for monthly bills. It’s too tempting to use the account if there are cheques around. Because when you use a line of credit for a monthly bill – the next bill will be here in thirty days, while you’re paying the last one off with interest over a year or more!

8. Close your overdraft. I know – it’s like being hooked on drugs. It’s so convenient and always there and you can’t live without it any more. Well, that’s what the banks were counting on, and where they make a huge amount of their profit. But it’s killing you. Just a $1,000 overdraft will cost you between $200 and $300 in interest and fees. It’s a one-time pain to cancel the overdraft, but it’s worth it.

9. Change to a credit card that isn’t a credit card. We’re now averaging three credit cards each, and it’s rising, while card issuers keep upping our limit to make sure we have much less chances of paying them off every month. With no grace period and over-limit charges, it’s a recipe for spending a ton of money needlessly. Get yourself an American Express Green card. That’s not a credit card – it’s a charge card. At the end of the month, there are no payments to make – the balance has to be paid off in full. Oh sure, the first month that’ll be painful. But after that, you’ll watch what you’re charging pretty carefully, and you’ll never ever have a credit card balance again. What’s that kind of financial freedom worth?

10. Contact the credit bureau to get a free copy of your credit report. Almost all lenders now base your interest rate on your credit report and its credit score. So you have to know what’s in there and whether there are errors on your file. The how-to is in the It’s Your Money book and will take under five minutes. Less than 30% of us ever look at our file and that can easily cost us two or three percent on everything we borrow. After all, knowing is always better than hoping.

11. Keep your car for another year. If you believe a cool car is a status symbol and a must-have, you’re doomed to be in debt for decades to come. Not to mention that almost 50% of people trade their vehicle and STILL owe more than it’s worth – that’s financial suicide when you take your extra debt and just roll it over to the next new car with interest for another five or six years. It makes things worse – much worse. And your car will never increase in value. So the goal should be to drive a reliable vehicle that doesn’t have payments with it which are killing your chances to save or get ahead financially. Imagine a couple of years without car payments and the huge financial advantage you’ll create for yourself. And remember: Those $400 car payments are actually more than $600 in gross earnings. If you can’t get a $600 raise this month – here’s a way to get it – you’ll just be giving it to yourself!