519-646-2222Cash Flow your Debts
If you are like most debtors, you don’t really pay your debts, you cashflow your debts. According to the Canadian Bankers Association more than half of Canadian credit card holders pay their balances in full each month. But that is not exactly correct – and here’s why.
First of all, there’s a debt trap with credit cards, just in the way statement balances are paid – let’s say your statement date is the 15th of the month but your payment due-date is the 27th. Then on the 27th of the month you pay off the previous statement balance – you will still have accrued charges for (twelve days) one third of the month on your account.
Secondly, if you do a balance transfer your credit card will be recorded as “paid in full” when clearly that is not the case, this is similar to other kinds of financing payouts. Back to the cashflow versus pay out, even people who are recorded as paying out are simply cash-flowing their debts. Not in the same way as making minimum monthly payments, but the effect is the same – the debt doesn’t go away.
A worse kind of cashflow comes when one debt is used to pay another, it’s a lot like taking a five dollar bill out of your left pant’s pocket and putting it in the right one and thinking you have just discovered five bucks that wasn’t there before.
What does a credit card balance mean to you “Honey, we got approved for ten-grand on the new MasterCard, quick grab the kids, we’re going on vacation”. Yeah, O.K., so, I’m exaggerating the case, but many consumers view credit card limits as “available funds” instead of “potential debt”. If you can’t afford to pay it off immediately or by the end of the month then don’t charge it!
LITs see consumer debtors with all sorts of credit card scenarios – some have multiple cards, as many as twenty, while others have very high balances, in the five-digit range. A lot of bankrupts, at one time estimated (by TransUnion) to be 70%, had “strong credit scores” when they filed for bankruptcy. They are able to manage this by cash-flowing their debts, using one card to make the minimum payments for another.
Some folks just happily go along making minimum, or slightly better, payments on credit cards and lines of credit for years and years – the real cost of cash-flowing debt is enormous. Some folks make comments such as “I have paid that debt several times over with interest payments” and they are quite right. Stop cash-flowing and start paying it off, if you can’t afford to, just call us for a free consultation to learn a better strategy. 519-646-2222