Q- I am finding the cost of living in Canada very high, and often have to use my credit card to make ends meet. I’m lucky I have a credit card, but am finding my total keeps increasing even though I’m making monthly payments. How can I stop this cycle?

A-It appears to me that your living expenses are higher than your income. Then, to meet this deficit, you are using your credit card regularly, but then only paying the card’s monthly minimum payment instead of the full amount you charged. This is a very common problem in North America. You have to keep two things in mind here. First, credit card debt is the most expensive debt you can have. Second, if you are ever late in paying, the credit card companies penalize you by either increasing your interest rate or charging minimum fees, or both.

The minimum payment on credit card bills usually represents the interest payable, which could be as high as 24 per cent per year — but you will never be able to pay down the principle this way. The fact that your balance is increasing means you are probably paying even less than the interest owed. You will never come out of this vicious cycle if you keep paying only the minimum amount every month. Your starting point is to analyze your personal balance sheet. This is a simple document where you list all the cash, short-term investments and assets like your house. Next, you list all your debt, including credit card debt, lines of credit, mortgage and other loans. You then prioritize your debt based on what debt has the highest interest rate, usually credit cards. This exercise may reveal that you have some money sitting in banks and other investment accounts not doing much while you are paying high interest on credit cards. In this case, you could consider using those funds to pay off your credit cards immediately and try to keep them current from this point on.

Your second step is to keep track of each and every expense you make. For this exercise, I suggest you involve your spouse and older children. Discuss all the discretionary expenses that you can cut (e.g., that coffee and muffin you buy on the way to work, impulse buying, dining out or vacations) until your debt is under control. Consider other ways to reduce your expenses like buying no name items versus expensive brands. Another trick is to defer any big buying decision by a day; this gives you enough time to think whether you really need that item.

The third step is to make a budget in which your monthly expenses are at least 20 per cent lower than your income. Be truthful to yourself while making this budget and list each and every expense including the interest on credit cards. Keep at least 10 per cent for any unforeseen expenses, such as unexpected car repairs. Then use the 20 per cent saving to pay off your debt. The key to financial success is to take control of your debt before it gets out of hand.





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