My thoughts on Credit Cards

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Credit Cards

One of the worst financial mistakes a person can make is to overspend and maintain a balance on their credit card. The average canadian who had credit card debt in 2015 owed a balance of $3745.  With average credit card interest rates in Canada being 19%, this equals to $711.55 in interest annually.  That is a lot of money spent on just maintaining that debt, most people in that much credit card debt are gaining more rather than paying it off as debt ratios are increasing in Canada.

If you are one of those people, don’t lose hope.  It’s never to late to take control of your finances and you can recover.  I’ve been there, I had over $10000 on a credit card after my wedding.  I actually remember speaking to the representative from my credit card company and asking for the limit increase.  They didn’t offer, I asked.  I deliberately increased my limit to pay for a wedding I couldn’t afford.  Mind you it was one heck of a wedding in Jamaica and everyone had a great time but we held that debt for a very long time.  Below are a few ways I learned to stop the bleeding and get back on track.

Needs vs. Wants

The process to avoiding credit card debt is simple in theory: separating needs from wants. Not so easy in practice, in fact it can be extremely difficult. If a person considers every dollar an investment and spends less than they make, they can avoid falling into a credit card trap or dig their way out.

Budgeting

Budgeting is important, this means tracking income and spending accordingly to allot enough money for:

1.  Needs (water, food, shelter, utilities)

2.  Debt repayment (credit cards, , vehicle loans, lines of credit and mortgages)

3.  Savings/Investing (emergency fund, down payment for a mortgage, stocks/bonds)

4.  Living life to the fullest (whatever is left over)

A person’s lifestyle capabilities are highly dependent on their income, the smaller the income, the less wants a person can afford.  It can be a harsh reality, I know, we are a middle class Canadian family but figuring out where I stood financially was crucial to getting on the right track to financial freedom. I don’t have any recreational vehicles, I don’t go on tropical vacations (just my wedding), I don’t buy the latest electronics, I don’t buy new vehicles, I don’t wear designer brands. I sacrifice these luxuries now to possibly enjoy them in the future when I can actually afford them.

Small ways we save money

1. Eat take-out as little as possible.
2. Buy more food at Costco or at the local market in bulk.
3. Only drink coffee made at home
4. Cost effective entertainment (reading, walking outdoors, swimming at the lake and enjoying the sun)
5. Avoid unnecessary trips in the car to save on gas
6. Be more conservative with utility usage
7. Buy quality clothes at thrift stores
8. Look on www.kijiji.ca for quality used items
9. When buying new, always shop for a sale or the best price online
10. Renegotiate fixed expenses, call the bank, phone company etc and ask for cheaper rates, never hurts to ask.

 

I know these steps are common sense and quite obvious but they are a good reminder of the basics and really there is no need for an elaborate scheme to get and stay on track. The solution is as simple as making cutbacks where possible until you spend less than you earn.  I now have an “excellent” credit score which is the highest rating in Canada.  It’s useless to me because my number one priority is to avoid any kind of debt at all costs but I still like knowing what it is.

I think everyones goal should be to work towards getting off the debt treadmill all together and stay off.  While no one will cause physical harm over debt, debt collectors can change a person’s lifestyle drastically if payments aren’t made.  If a person can monitor their spending and avoid debt, they are well on their way to financial freedom.