Common Types of Debt and How to Deal with Them

There are many different types of debt that cause unmanageable stress. Creating a viable budget is the first step to finding a solution. It is also important to recognize that different types of debt will be a factor in determining the best option to solve a credit issue. When seeking a solution to credit problems it is always best to talk with an accredited Credit Counsellor to create a manageable budget and the alternatives to remedy debt issues.

Dealing with Credit Card Debt

Credit cards are very easy to get, use and accumulate debt with. Most cards have high interest rates and small minimum repayments causing the balance to grow quickly to the point where it can take decades to payoff.

The ease of use that credit cards allow coupled with the low minimum repayments amounts and high interest rates create a credit situation that can easily spin out of control. Often the immediate solution to a maxed out credit card is to apply for another. Ultimately the debt is so high that it seems that the minimum payments no longer address the balance owing.

It is important to find the correct solution when addressing credit card debt. Opting to address the debt on your own with a dedicated payment plan, attempting to negotiate interest relief, consolidating through a financial institution, or seeking a reputable organization to intervene on your behalf can be overwhelming. A poor decision could result in a larger than anticipated dollar cost, poor credit or unexpected legal impacts.

Reviewing alternatives with an accredited credit counsellor can reduce the confusion and outline the positive and negative impacts of the different alternatives open to address credit card debt.

Dealing with Student Loan Debt

Learn about the options available to you to tackle your student loan debt.

Student loans have become common place with rising post-secondary tuition fees many students can’t afford the price of education from their savings account alone. A common form of financing is a government issued student loan. Although relatively easy to acquire with little or no credit history, repayment can be difficult upon graduation when confronted with an entry level job and high cost of living.

While student loans have become common and the application process is well presented, the repayment process after graduation is rarely considered.  Low paying entry level jobs, unexpected costs of living and changes in family situation can make repayment very difficult.

Seeking advice from an expert to help manage other debts and work student loan repayment into the budget will help ensure that all obligations are met.

Dealing with Medical Debt

Medical expenses are costly especially as they often come with a period of reduced income.

Unfortunately, many medical expenses are not covered by Universal Care but are required in order for a person to function. Even worse these medical expenses often occur in conjunction with a person not being able to earn income causing both debt and stress.

In this type of situation it is best to consult with an accredited credit counsellor who can help highlight immediate goals and look at long term alternatives that are available to deal with medical and other debts may have accumulated. 

Cellphone Debt and your Repayment Options

Learn how to deal with accumulating cellphone bills effectively.

Cellphone debts are problem for an increasing number of people. While often the debt is relatively small, it can have a dramatic impact on a person’s credit.

Cellphone debts occur for a variety of reasons. They can result from a change of provider, missing a few payments or helping a friend or family member by getting a contract in your name. Sadly the consequences can be severe.

Though the amounts owed are usually small they can impact credit to the point where dreams of buying a car or house are put on hold.  There can also be ceaseless calls from collection agencies that are seeking payment.

To best address cellphone debt with the aim of reducing creditor calls and positively impacting credit scores, talk to a credit counsellor to determine if the debt should be paid, worked into a consolidation program, settled or ignored.

Payday Loans

How to get ahead of the payday loan cycle.

Payday loans provide quick relief to a very stressful shortfall in cash flow. Beware of the costs and know that one payday loan often leads to several more.

The only stress worse than needing a payday loan it trying to find a way to pay it back. The fees and interest associated with payday lending is so high that borrowing money on one payday loan often lead to several others payday loans in an attempt to keep current.

The key is to stop the payday loan cycle. Seek help to create a manageable budget with an affordable repayment plan. It is usually best to seek the aid of a credit counselling agency that can intervene to consolidate and reduce the interest associated with these loans.

Mortgages – How to keep up with your monthly payments

Mortgages help people achieve the dream of buying a home. Second Mortgages and Home Owners Lines of Credit can be a trap.

While a mortgage is generally required to but a home, a Home Equity Lines of Credit (HELOC) often prevent people from paying off the loan. Many people use this type of credit to consolidate debt and take advantage of low interest rates and small repayment requirements. On many HELOC’s the payment requirement is just the interest. The principal never gets repaid and the loan lasts forever. Worse yet people continue to spend on their credit card doubling the financial damage.

Second mortgages are often used by individuals whose credit is impaired. The poor credit score results in high interest rates that inflate the overall cost of housing and reduces the amount of money available for other item in the budget. This will drive people to use other types of credit to maintain lifestyle. This erodes the equity they have built in their home while increasing debt load.

Consolidating debt using home equity can be a solution but requires broader plan to limit the use of additional credit and repay the consolidated debt. If there is no plan in place consolidating debt against a house will have limited success and greatly diminish equity in the asset over time.

Before using a mortgage to consolidate debt, seek advice on other alternatives that might provide credit relief and not risk the home equity.

Auto Loans – Contract and Repayment Details

Car loans are appealing with enticing interest rates and low advertised payments. Auto-loan contracts are very hard to break and can be hard to pay for.

It is very difficult to get out of a vehicle contract when a major financial issue occurs whether it is a job loss, divorce or other life event. The situation is made more complex as people require their vehicles for work and as provincial laws vary around legal ramifications after repossession.

Repossession has a large impact on both credit and lifestyle. Before making a decision to stop paying, allowing a voluntary repossession or not paying as agreed, it is wise to know what the long term impact will be. Seek advice from an independent credit counselling agency before taking action.

Lines of Credit

Lines of credit are often treated like cash in a bank account. Once the credit limit is maxed out bills, credit card payments and even the things you need can be hard to pay for.

A line of credit can be a good tool to consolidate debt, address the occasional emergency or unplanned expense. Many people fall into the trap of using them to cover everyday living expenses including credit payments. The problem is that balances quickly grow as does the cost of repayment. Eventually the credit limit is reached and the minimum payments are all that can be addressed.

In this situation it is best to review all options and come up with a plan that will address the Line of Credit and all other debts in a reasonable amount of time. Creating a livable budget will help ensure that money can go toward savings to eliminate the need for this type of credit product in the future.

Utility Bills

Utility bills can be hard to manage with so many financial priorities to contend with. It can be hard to catch up on missed payments without a plan.

Late or delinquent utility bills are often a sign that money is a growing concern for a household. When utilities have gone unpaid people are often on the verge of having a full financial crisis which can lead them down the negative path of high interest lenders and payday loans.

It is imperative to review the budget, determine key spending priorities and then deciding on the correct option to address any arrears. This could include a Debt Management Plan that also provides the benefit of a set time frame to improve credit reports.

Dealing with Tax Debt

Taxes debt often occurs due to a financial crisis and catch up payments can be hard to manage in a normal budget.

Money owed to the federal government (taxes) must be addressed by direct repayment of the account or another legal alternative. This debt never disappears and will prevent other lenders from consider loan applications.

The CRA has a great deal of power to enforce repayment and do not need to go to court to seize assets or garnish wages. Do not ignore the situation!

Tax debt needs to be addressed and requires an honest review of what caused the situation and how to avoid a reoccurrence in the future. Before making any payment arrangements with the CRA it is important to know what you can afford or what other options might be available based on the individuals own situation.

Before taking action ask for help from a not-for-profit credit counselling organization that can review budgets, other debts and legal alternatives to address tax debts.

Secured Debts vs Unsecured Debts

Know the difference between secured and unsecured debts so that you can figure out how to best deal with them. Knowing this is a major factor when seeking a solution to credit issues.

Banks and finance companies try to maximize their profits while minimizing their risk particularly on large loan amounts. One way to minimize risk is to tie collateral to a loan. This collateral can be taken by the lender and sold to recover money owed in the event the loan is not paid as agreed. Common types of collateral are:

• Real Estate
• Cars
• Boats
• Vehicles
• Investments

Depending on the provincial law seizing the asset will end the contract or can be sold to offset a portion of the loan outstanding and may still be followed by court action. Before court action can be taken the lender generally needs to repossess the collateral in an attempt to remedy any outstanding monies owed.

Know the law before voluntarily relinquishing an asset as there could be further credit and legal repercussions.

Smaller debts like most credit cards, lines of credit and overdrafts are usually unsecured. There is no asset tied to the debt. If the loan goes unpaid a borrower can expect collection calls and the possibility of a lawsuit and a judgement against them.

If unsure how to proceed seek advice from the non-profit Credit Counselling Society.