Don’t Be Fooled Into High Interest Debt Obligations

2018-03-31   minute read

Michelle Scheller

MNP Consumer Debt Index

Credit today is more accessible than ever. On top of that are endless advertising and marketing initiatives that would have us believe lenders are our friends — here to help us out in a pinch. But that's not necessarily the case. While taking on debt may seem like a quick and easy fix, many of your so-called options are just clever traps designed to part you with your money.

Person looking at their laptop with their face in their hand

Here are just a few ways lenders will try to fool you and how you can beat them at their own game:

Minimum Payments

You know you owe several thousand dollars on a credit card. You also know you can't afford to pay that all back immediately.

"Fear not," says the lender, "you need only pay a small fraction of that each month!"

Minimum payments look so appealing because they offer the perception of affordability. But they're a terrible strategy if you goal is to get out of debt. While they will certainly keep the creditors at bay, that's only because they're earning a windfall in interest charges — which is effectively all your minimum payment covers.

If you look at the bottom of your credit card statement, it will tell you how long it will take to pay off making only minimum payments. For example, with a balance of $6,000 and annual interest rate of 29.9% it would take 27 years and four months!

Escape the trap – Always pay more than the minimum balance and avoid carrying a credit card balance whenever possible. If you are carrying a balance, stop using credit until you have paid off the debt. Avoid signing up for multiple cards as that makes it easier to miss and fall behind on payments.

Rewards Plans

Certain financial institutions or credit issuers will offer dollar, point or flight distance rebates for every dollar you spend on their card. While this initially seems like a nice perk, the reward value is significantly less than the interest costs you'll incur by carrying a balance on those cards.

If you're using your card in hopes of reducing the cost of your next vacation, you'll want to ensure you're paying it off each month — otherwise you'll find despite the points, you're only getting further from your dream destination.

Escape the trap – If you're using your credit card to build up points, pay off each purchase immediately by transferring money from your chequing account. If you notice a balance accumulating, stop using the card until you've paid it off.

Cash Advances

You're in a pinch. It's a week until payday and your bank account is at zero. You need money to pay the babysitter and begin to panic. Then you remember those blank cheques your credit card issuer sent you in the mail. You fill it out and take it to your bank for a cash advance.

While this may seem like a quick and easy solution to a difficult problem, you've unwittingly opened Pandora's box. With regular credit purchases, interest is calculated monthly — meaning if you pay your balance by the due date, you won't face any additional charges. Cash advances, on the other hand, accrue interest daily — starting the moment you withdraw the funds. On top of that, the interest rate is typically between five and ten percent higher and there may be other hidden "convenience" fees as well.

Escape the trap – Set up and contribute regularly to an emergency savings account to avoid requiring credit to pay for unexpected costs. Also, read the terms of your credit agreement closely to understand the interest costs and added fees of cash advances. Any time your lender sends you blank cheques encouraging you to take a cash advance, shred and dispose of them immediately.

"Easy" Lenders

These are the most devious of all. They go by many names. Easy lending institutions, payday loans and term loans, just to name a few. They offer quick, hassle free money immediately without the rigmarole of credit checks or a drawn-out application process. Predictably, these lenders tend to focus their marketing to low-income consumers or people who cannot secure a loan through regular channels.

But, of course, there's a catch: interest rates can be as high as 46.96% per year. Meaning if you borrowed $5,000, your monthly payment would be $375. If you took 36 months to pay off the initial loan, the total cost to you would be $13,500. That's not even accounting for any built-in insurance costs or other fees they may not disclose up-front.

Escape the trap – If it seems too good to be true, it probably is. Avoid these lenders entirely. They are one of the quickest routes to insolvency.

Defeat Your Debt

Now that you know some of the clever tricks lenders will use to try and fool you, it's time to beat them at their own game. The truth is there are advantages to using credit — it's convenient, you can usually access 30 days or interest-free debt and rewards points can be valuable if you don't carry a monthly balance.

However, if you've found yourself in a situation where you can't keep up, there are options available to get the relief you need. A Licensed Insolvency Trustee offers a Free Confidential Consultation and several Life-Changing Debt Solutions that will provide you with a financial fresh start. Together we'll review your situation and work to find the option that works best for you — defeating your debt and putting an end to the lenders' tricks for good.

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