4 Ways To Eliminate Credit Card Debt

2014-08-11   minute read

Randy Kobbert

Debt Solutions

Many people experience the frustration that comes with trying to pay down – or ideally, off – their credit card bills each month. It can be difficult to see the majority of your monthly payment going towards high interest charges. Don’t worry – there is hope! Here are some common budgeting techniques and options available to help eliminate your credit card debt.

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1. Target the highest interest card first

If you are unable to qualify for a consolidation loan but can afford to make the monthly payments on your cards, use the approach of targeting the highest interest card first to eliminate your credit card debt as quickly as possible. This approach is feasible when you have a realistic cash budget which allows you to no longer use any of your credit cards.

Essentially this approach involves making at least the minimum monthly payments on all of your cards and then putting all of your extra money on your credit card with the highest interest rate. Once that card is paid off, move onto the next card with the next highest interest rate and so on, until all of the cards are paid off.

While this option may sound simple, it really will make a big difference by reducing the overall interest you pay and the time it takes to pay off your credit card debt.

2. Consolidation Loan

If you have multiple credit cards and other debts, you can consider applying for a consolidation loan. Traditional banks and even some credit card companies offer products to roll debt into one lower-interest loan. With this method, you make one monthly payment and more of each payment will be applied to the principle balance owing, rather than to interest.

Each bank has their own criteria for approving individuals for consolidation loans, but generally you must have a good credit score and have sufficient income to make the monthly payment.

If you have equity in a home, you could also use that equity as collateral for a consolidation loan, which would reduce the interest rate and allow for even more of your monthly payment to go toward the principle balance owing. That being said, be sure to take careful consideration prior to using an asset like your home as collateral.

3. Consumer Proposal

If you are unable to qualify for a consolidation loan and can’t afford the monthly payments on your cards, then you are likely receiving unpleasant phone calls and mail from collection companies. If that’s the case, it may be time to look at a more formal way to deal with your credit card debt.

An option that is appealing to many people is a Consumer Proposal. This is a formal settlement offer to all of your unsecured creditors. It is similar to a consolidation loan in that you’ll typically only have one monthly payment, but that payment is given to an administrator, who then periodically distributes the money to your creditors. Once a proposal is submitted, your creditors have 45 days to decide whether they want to it. As long as the majority of creditors (more than 50% in dollar value, meaning each dollar a creditor is owed is worth one vote), the proposal is binding on all of your unsecured creditors.

A major benefit of a Consumer Proposal is that your creditors have to stop all collection efforts (including phone calls and letters) once the proposal is filed. The proposal will typically reflect on your credit for three years after repayment has been completed.

If you want to go this route, you must file a Consumer Proposal with a proposal administrator (who must be a licensed bankruptcy Trustee). As licensed bankruptcy Trustees, MNP Ltd. can review all of the ways to eliminate credit card debt and help you determine if a consumer proposal is the right choice for you.

4. Bankruptcy

If the above options are unsuccessful and you are unable to meet your credit card payments then you may look at bankruptcy. Bankruptcy will eliminate your credit card debt and protect you from your creditors taking further action against you. In exchange, you will have several responsibilities including, but not limited to, making a monthly payment to a Trustee, providing a report of your monthly income and expenses, attending two counselling sessions on money management and having your Trustee complete your pre-bankruptcy income tax return. Bankruptcy will reflect on your credit for 6 years after your discharge, which can be obtained in as little as 9 months.
Don’t feel trapped by credit card debt. There is a way out - whether it’s a consolidation loan, paying off high interest cards one a time, filing a consumer proposal or declaring bankruptcy. Contact a local MNP Trustee for a free consultation to review your situation and help you determine which option is right for you.
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