A “surprise” consumer insolvency is one where a person’s credit history shows they are paying their bills on time as expected, but right before they declare bankruptcy. What this tells financial experts like Bill Christie, a retired personal financial adviser, is that all isn’t what it seems in the consumer world.
“Just because a person’s credit history indicates a person is paying his bills doesn’t mean he’s doing well financially,” Christie says. “All these reports show is that he can pay the minimum payment, not that he’s paying off the debt. And that’s why so many people are getting into trouble and declaring bankruptcy.”
Christie adds that it really shouldn’t be such a surprise that so many are swimming in debt, especially in rougher economic times. “People going into tremendous debt aren’t necessarily young kids who don’t understand how to use credit properly. Many people have lost their jobs and turn to credit to make ends meet. And they don’t try getting help until it’s almost too late.”
But even in some of the worst situations, do you really have to resort to bankruptcy? Christie doesn’t believe so. Here are a few ways you can dig yourself out of debt:
1. Admit there’s a problem. “There’s nothing wrong with trying to work things out for yourself,” Christie says. “But some folks go on for months thinking things will fix themselves, not facing the reality they’re in trouble. Realize the seriousness of the problem so you can get the help you need.”
2. Conduct an inventory. Write up a list of everything you owe and how much. “It’ll be a shocker for some people, but sometimes it’s the only way for them to take action,” Christie says.
3. Figure out how much you have to work with. “Think hard for this one because you may have more to play with than you think,” Christie says. “Do you go out to eat? Buy your morning cup of coffee? Take your car when you could walk or take public transportation? Do you smoke or spend more than you need to on groceries? Cutting down, or cutting out, any or all of these things can put extra money towards what you owe and reduce that total debt a lot faster.”
4. Allot the biggest chunk to the biggest debt. The smartest thing to do when you have a bunch of bills wanting your money is to pay the most to the biggest debt (which usually has the highest interest rate), and minimum payments to the rest. “Paying the minimum payment on a huge statement with a large interest rate will get you nowhere fast,” Christie says. “Pay at least double the minimum payment, and minimum on the rest. This will at least keep you current.”
5. As the debt shrinks, sock the money away. As you pay things off, put the same amount of money you were using to bring debt down into a high-interest savings account. This gives you some financial padding as you pull yourself out of debt.
6. As you pay something off, decide whether it’s worth keeping. Christie says that one of the main reasons for debt is having too much credit. “Once something gets to zero, ask yourself if you really need two or three lines of credit or credit cards. Pick one credit card and one line of credit with good interest rates and no annual fees and that’s more than enough.” You don’t necessarily need or want to close a credit card — especially if it’s one you’ve had a long time — because part of your credit score is dependent on the length of time you’ve had credit (called credit history). Sometimes it’s better to just cut up the card and never use it again. If you insist on closing accounts, close the newest ones first — and not all at once. Spread out the cancellations over several months.
7. If you can’t buy something with cash, you don’t need it. Once you’re finally on the road to being debt free, you have to continue practicing the art of restraint. “It’s just too easy to plunk that card down,” Christie says. “If you don’t have the money in the bank for that item, and you can’t pay it off on your card in one or two payments, leave it in the store.”
8. Keep track of your credit reports. Be sure to check your credit reports on a regular basis to ensure the information is current. Nothing is more irritating than working hard to break out of debt only to have it not be reflected correctly. It does take a while for things to be purged from your report, Christie says, so be sure what’s there is positive. If there are any discrepancies, report them right away.
9. Invest. “I can’t stress enough the importance of starting up some sort of investment fund,” Christie says. “Whether you choose mutual funds, Registered Retirement Savings Plans (RRSPs) or some sort of rollover fund, put some money away. If you need advice, seek a banking or financial expert to advise you on what will work for you.”
10. Follow the 10 percent rule to financial freedom. Christie advises that, in addition to the above saving tips, a person should be placing 10 percent from their pay cheques into an entirely different account as a backup. “In these economic times, it’s been said to have at least three months worth of rent/mortgage, bills, groceries, and other things stashed away in case one loses her job. At the very least, the 10 percent fund can be something to dip into when your regular funds run out before the next payday or for saving for things you want.”
In the end, the above steps may sound easier said than done, but they are possible to follow. As Christie says, “It doesn’t take much effort or time to get into debt, but it can take a long time to get out of it. Take the necessary precautions to avoid getting there in the first place. You don’t have to be rich, but you do have to be smart.”
