Reassess your debt obligations
First off, let us take a look at those credit card statements. You know which ones I’m talking about…the ones you pay only the minimum monthly balance required – ouch! They are the same ones that have interest rates as high as 28%. But if you are carrying a balance on your credit card, you’re not alone.
Did you know that Canadians have over 50 million VISA and MasterCard cards? Many of those cards carry a monthly balance, to the total tune of over $50 billion and growing! Over 90% of Canadians say they carry more debt today than they did six years ago – what’s with that? To make matters worse, 80% don’t even know their own credit score (2007 Credit Canada study).
Educational point worth repeating here – it’s important to know your credit history and how to manage your debt because the bottom line is…debt is a real cost and it’s costing you big if this is increasing each year. Remember…credit cards don’t belong to the customer…they are the property of the bank that issued them.
Now back to your statements. Line them up and write down or open a spreadsheet.
Here’s a simple example:
| Credit Card Name | Interest Rate | Credit Limit | Balance Owing | Monthly Minimum |
| VISA | 12.90% | $5,000 | $2,000 | $40 |
| MasterCard | 15.50% | $8,000 | $3,000 | $60 |
| American Express | 19.80% | $10,000 | $1,000 | $30 |
| Sears | 28.00% | $2,000 | $500 | $10 |
| Totals | $25,000 | $6,500 | $140 |
Now that you have a “snap shot” of what you owe and where you are at this point in time, let’s consider your options. One option is to call each card company and negotiate a reduction of the interest being charged.
Also, if your spending is out-of-control…get control back and place all the cards in a safe place – like your freezer to “freeze” your credit spending – do not use them until you have control over them.
You have a new mandate now: Pay off those credit cards! Where possible, explain to the card issuer that you would like to reduce your credit limit to the lowest limit available. The problem with many card issuers, their lowest limit is $5,000 – see if they can go lower – it doesn’t hurt to ask.
| Cards in the “freezer” | Interest Rate | New Limits | Balance Owing | Monthly Minimum |
| VISA | 12.90% | $5,000 | $2,000 | $40 |
| MasterCard | 15.50% | $5,000 | $3,000 | $60 |
| American Express | 19.80% | $5,000 | $1,000 | $30 |
| Sears | 28.00% | $2,000 | $500 | $10 |
| Totals | $17,000 | $6,500 | $140 |
By doing this, over a short period of time, your FICO score (a credit score derived from the credit model developed by Fair Isaac Corporation), should reflect more positively and go up because your available credit limits are going down.
Now it’s time to consolidate the balances on the cards which charge the lowest interest rates – no sense paying more interest than you have to.
| Consolidate Cards | New Interest Rate | Credit Limits | New Balances | New Payments |
| VISA | 9.90% | $5,000 | $3,250 | $100 |
| MasterCard | 11.50% | $5,000 | $3,250 | $100 |
| American Express | 19.80% | $5,000 | - | - |
| Sears | 28.00% | $2,000 | - | - |
| Totals | $17,000 | $6,500 | $200 |
Why did I evenly spread the balances between the two cards you ask? In the example, the ratio is only 65% of the total limit used. We could have put most to the VISA card –up to 90% of the limit – but that would lower your credit score and we don’t want to do that.
Let’s also assume that you successfully negotiated with both VISA and MasterCard to lower the interest rates they charge you. I would also suggest you increase your monthly payment by an additional $60, making the total payment $200 where $100 is being paid on each of the cards.
There you go, you are in charge! You’ll have these paid off in no time…
It’s these small but simple incremental steps that make a big difference. If you can make larger monthly payments, then do so! Once you have control over your debts the next thing to do is…