Dealing with your credit card debt
Credit card debt is an overwhelming concern for many students. While banks hand out $500 + credit cards to students to help build up credit while we’re in school, often the exact opposite happens. Banks don’t act judiciously when they give you access to credit. It’s in their favour for you not to be able to pay off your credit card bill each month, as they can collect interest payments from you. These payments are often upwards of 19 per cent annual compound interest. This means next month, if you don’t pay off your bill, you’ll be paying interest on the interest you accrued this month. As a student, you may not have a job, or your job may just provide supplementary income, and it may seem like it’s impossible to pay off your debt, but the truth is now is the best time to pay off your credit card(s).
Recently, 4th year student Richard C. finally paid off his credit card bill. Initially, Rich felt bogged down by his credit card debt, but he had this to say about the experience: “Paying off my credit card feels great. I finally feel like I have some control over my life again. Paying off my credit card was an uphill battle. There were many times I wanted to give up and forget about it but I stuck to my [repayment] plan and it paid off!”
It’s important to decide on a repayment plan and stick to it. Often credit card debt is a result of living beyond your means, and so it really takes lifestyle changes to not only live within your means, but below them, so that you can use some of your income to pay off past expenses. For Richard, that repayment plan included paying off at least $100 of his credit card bill with each paycheque he received. While he didn’t have a financial advisor, he understood the importance of being debt free so he could start saving for his future.
Richard asked me if he should lower the limit on his card. After racking up a credit card bill that took a lot of time, commitment, and lifestyle changes to pay off, it can be difficult to trust yourself enough to continue to use it. You may be wondering if you should just cancel it. What you should know before making this jump is that your credit score can be negatively affected by you cancelling or lowering your limit. The banks can see this as a sign that you don’t trust yourself with the available credit, and in turn, your credit score takes a hit. Make sure to consult a financial advisor before you make any big moves with your finances. The financial advisors on the third floor in the University Centre can provide you with a lot of assistance in times like this.
I suggested to Richard that he use his credit card for regular purchases, starting with things like groceries. If necessary, he could leave the card at home and only take it with him when he goes to the store. Having a budget in mind is always a good idea – know how much you’re prepared and willing to spend – and make sure you have the money in your chequing account to pay the bill. When you first start using the card again, consider paying the balance immediately when you get home, or from your phone if you use online banking. It’s an excellent way to build credit and at the same time know that you’ve already paid the bill so you don’t have to worry about having the money at the end of the month.
After you’ve paid off your credit card, it’s a great time to start your savings. You’ve already adjusted to a new lifestyle where you’re living off of less money than you make, and that is something a lot of people struggle with. This is a great time to start a savings account, or start putting in regular deposits. You can ask your bank to have the money deposited directly into your savings account each payday.
If you’re living with credit card debt, talk to a finance professional as soon as you can. Even if you don’t have an income, there may be ways to lower your interest payments, such as replacing your credit card with a line of credit, or changing the credit card type that you have to lower the interest rate you’re paying. Take the steps towards getting your finances sorted out so you can start saving for your future.