Many Canadians are finding out that one of the fastest ways to bankruptcy is the excessive use of credit cards. Credit cards are so alluring because the offer the promise of instant gratification, and the ability to make low minimum payments. They make large purchases that we would never afford otherwise suddenly within reach. And that is one of the problems. It is easy to forget about the interest you are paying, and instead get caught up in the low minimum payments.
You can go for years, accumulating credit card debt, until one day something happens: The credit card card issuer raises your interest rate or minimum payment, or your hours at work are cut, or you end up getting in an auto accident. Suddenly, your payments don't seem as affordable, and you realize just how much credit card debt you have. The only way out may seem like bankruptcy.
Douglas Hoyes, a bankruptcy trustee, points out that 93% of Canadians filing bankruptcy or a consumer proposal have just under $20,000 in credit card debt at the time of filing. That is a rather large wake-up call for many Canadians. It also illustrates the rather unfortunate effect that credit card debt can have on one's finances. Many Canadians just go along, living with their debt, until something happens to them. With their credit cards maxed out, there is no way to meet their new obligations, and bankruptcy seems like the best choice.
Avoiding Excessive Credit Card Debt
In order to reduce your chances of filing bankruptcy, it is a good idea to avoid excessive credit card debt. Bankruptcy can damage your credit score, and cause other financial problems. Here are some things you can do to reduce your chances of filing for bankruptcy:
- Create a budget: When you have a spending plan, you are more likely to keep track of where your money is going. Know your financial situation, and keep track of all your spending -- including what you are spending with credit cards. Keep credit card spending within budget.
- Pay off credit cards each month: Pay off your credit card balance each month. Stay within your budget, and pay down your credit cards so that you are not incurring interest charges.
- Set aside money for emergencies: An emergency fund is a good thing to have. Make sure your budget has room for setting aside funds for emergencies. That way, when the car breaks down or some other unexpected expense comes up, you don't have to resort to using credit cards.
Proper financial planning can help you prepare yourself to avoid bankruptcy -- and avoid the pitfalls of credit card debt.
This post was included in the October 29 edition of the Carnival of Financial Planning at the Skilled Investor blog.
AMEN to that! Credit cards are the Devil’s Right Hand when it comes to Fiscal Ruin, and I have seen it too many times in my life.
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