As a credit counsellor, the first thing I ask my clients when they walk in my office is how they got into financial trouble. Every client has a unique story but there are certainly common trends as well. The following are some of the basic reasons people find themselves in debt and some helpful ways to deal with these situations should they happen to you.
- Not Sticking to a budget
Not knowing how much you spend on variable expenses (such as groceries, clothing, gas) leaves you vulnerable to spending more than you can afford based on your income. If you create a monthly budget it’s important to stick to it! If you allow $200 for food a month, then make sure to write down your expenditures and don’t go over that $200 mark. If you find that you are constantly struggling to stay on track then it may be a sign that you need to take a second look at your spending plan and rearrange what money goes to which expenses.
- Change in employment/unemployment
Layoffs can happen at any time. It’s important to create an emergency fund large enough to cover your living expenses for 3 to 6 months as getting back on your feet may take longer than expected. This is especially important for those not eligible for government support i.e. Employment Insurance.
- Change in family situation
With divorce or separation comes changes in monthly expenses (renting a new apartment, child support, etc.). Meanwhile, if you’ve just welcomed a new baby to the family, prepare for the expense of diapers, child care and Sophie toys just to name a few. When your life situation changes, make sure to update your budget to reflect these changes. If your income hasn’t increased as much as the new expenses then it’s time to take a look at what things can be cut or reduced to keep you on track.
- Over spending
Not living beyond your means is crucial. Credit card debt is an easy trap to fall into. Sure a trip to Mexico or a pair of designer jeans would be great but be sure you can afford these luxuries before you swipe that plastic card. Paying with credit means that the goods you are buying today will cost you more down the road if the bill is not paid in full by the due date.
- Unexpected expenses
Having an emergency fund can save you from going into debt over a fender bender, emergency dental or racoons in the attic. Make sure to put a little away for a rainy day regularly. The same goes for self-employed workers. Do not leave tax planning or GST payments to the end of the fiscal year. If you do, you are in for a big shock. Plan ahead and deduct regularly to make taxes easier come due dates.
- Borrowing from Peter to pay Paul
If you find yourself jugging payments and bills, paying a credit card bill with another credit card, or using payday loans to get you through the month, you are only delaying and in doing so increasing the total amount of debt owed to creditors. If things are that tight then major changes may be necessary to get back on the road to financial sustainability.
- Illness
Make sure you have adequate short term and long term disability insurance should you become ill or hurt and unable to work. Your ability to earn income is the most important asset in need of protection and is often over-looked.
Frequently Asked Questions
Have a question? We are here to help.
What is a Debt Consolidation Program?
A Debt Consolidation Program (DCP) is an arrangement made between your creditors and a non-profit credit counselling agency. Working with a reputable, non-profit credit counselling agency means a certified Credit Counsellor will negotiate with your creditors on your behalf to drop the interest on your unsecured debts, while also rounding up all your unsecured debts into a single, lower monthly payment. In Canada’s provinces, such as Ontario, these debt payment programs lead to faster debt relief!
Can I enter a Debt Consolidation Program with bad credit?
Yes, you can sign up for a DCP even if you have bad credit. Your credit score will not impact your ability to get debt help through a DCP. Bad credit can, however, impact your ability to get a debt consolidation loan.
Do I have to give up my credit cards in a Debt Consolidation Program?
Will Debt Consolidation hurt my credit score?
Most people entering a DCP already have a low credit score. While a DCP could lower your credit score at first, in the long run, if you keep up with the program and make your monthly payments on time as agreed, your credit score will eventually improve.
Can you get out of a Debt Consolidation Program?
Anyone who signs up for a DCP must sign an agreement; however, it's completely voluntary and any time a client wants to leave the Program they can. Once a client has left the Program, they will have to deal with their creditors and collectors directly, and if their Counsellor negotiated interest relief and lower monthly payments, in most cases, these would no longer be an option for the client.
