Credit Cards Debt

As you will see from Sophie’s* case, having more than 2 credit cards can quickly turn the management of monthly payments into a real circus. By multiplying due dates, you increase the risk of late payments that can impact your credit history for many years. Additionally, having more than 2 credit cards can be viewed unfavorably by your creditors because, in general, with 2 major credit cards (e.g., Visa, Mastercard), you can cover your needs literally all around the world.

Case study:

Sophie, 38, likes to indulge in small pleasures. This city official earns a comfortable salary, but she is dealing with so many credit cards that she ended up losing control.

Until recently, the young woman has always been able to use credit wisely. But since she ordered a lot of items on the internet, her expenses have increased: she let herself be tempted by prepared meals, beauty products, clothes, and much more. It’s almost become a game, and Sophie loves receiving packages at home. This is where the problems started to arise, imperceptibly.

With 5 credit cards as well as financing (Buy now-Pay Later) on the purchase of patio furniture, she ended up forgetting to pay off one of her credit card balance. Then, came another and soon, within a few months, she had lost control and felt overwhelmed. Before being completely disoriented, she faced the fact that she needed help. That’s when she came to us for advice.

Assessment of the situation

The first step is to prepare Sophie’s balance sheet (list of debts and assets), explains Pierre Fortin, president of Jean Fortin et Associate. Sophie has almost no assets and that she has accumulated $12,215 on her credit cards.

“With 5 cards to manage and different due dates, it is not surprising that she ended up skipping payments,” notes Pierre Fortin, who wanted to check what impact these failures had on her credit. His file obtained from the credit agency reveals that there are already negative consequences, not only on his credit rating, but also on her credit score which has dropped to 685 (the maximum score being 900). Fortunately, it is still above 650, which is the minimum acceptable threshold for most financial institutions.”

To know if Sophie is eligible for a consolidation loan that would allow her to combine all her debts in a single payment with a lending financial institution, we calculated her debt ratio.

“This is an exercise we advise to do at least once a year. It can easily be calculated on the monratioendettement.com website. In Sophie’s case, her ratio, after the consolidation loan, would be 40% which is the limit usually tolerated by banks, “says Pierre Fortin. This solution, coupled with the fact that she has a stable job makes her eligible for this solution.

Review the budget

But before opting for a loan, it must also be determined whether the reduction of certain expenses would not establish a realistic plan for repaying debts. “In Sophie’s case, even with expenses that I would call minimal – no cable, no savings, no vehicle repair costs, only $600 a year for vacations, no or little clothing purchases, etc. – there is still a deficit of $100 a month once she makes the minimum payment on her credit cards,” remarks Pierre Fortin. The status quo is therefore not an option.

Consolidating your debts

Sophie opted for the consolidation loan to repay her $12,215 in debt. Because it has a lower interest rate than credit cards – 12% in this case – the monthly payment will be only $271 per month compared to $385. In addition, the debt will be repaid in full within a maximum period of 5 years, since there is a payment schedule to respect. Fortunately, Sophie reacted quickly, because a few more months at this rate would have affected her credit report even more and compromised her chances for obtaining a consolidation loan.

“To reduce the temptation to plunge back into the credit trap, we also suggested that, until her loan is repaid in full, she should keep only one card for emergencies only,” concludes Pierre Fortin.

Sophie’s Financial Situation:

Debts:
     Cards Visa, MasterCard and Ultramar: $7,090
     Cards Canadian Tire and The Bay: $2,425
     Financing purchase of patio furniture: $2,700
     TOTAL: $12,215

Assets:
     Condo with little equity: $5,000
     Rented car: $0
     RRSPs: $2,500

Income:
     $3,400 net per month ($52,000 by year)

**The names have been changed to protect their identity. **