Financial Myths and Misconceptions Debunked
Canada’s national debt statistics are, to be frank, quite shocking.
Believe it or not, the average Canadian household is paying off almost $21,000 in non-mortgage debt.
What’s more, almost 15% of their household income is spent on repaying those debts.
Nearly half of which (7.1%) is wasted on paying interest to creditors.
How did we get here?
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It’s not because Canadians are inherently prone to making huge irresponsible purchases.
It’s not even because we all live a lifestyle that’s beyond our means.
In many cases, it’s simply because nobody taught us the financial literacy skills that can keep us financially healthy and free of debt.
What’s more, since the 1980s, low interest rates have allowed us easy access to cheap credit.
This, combined with relying on “common sense” financial knowledge can prove a devastating combination for our household finances.
In this post, we’ll bust some popular financial myths and misconceptions wide open.
So you can fix the bad habits which can allow your debts to get the better of you…
Myth: It’s a good idea to make the minimum repayments on your credit cards
Fact: This is the worst possible thing you can do with credit card debt.
You may assume that making the minimum repayments on your credit cards is a good idea because it will leave you with more disposable income every month.
And while this may be true, it is the essence of false economy.
It can prolong your debts so that they take longer to repay, as well as ensuring that you throw more of your hard-earned money away on interest by the time the debt is cleared.
You may assume that this is a price worth paying for a little more disposable cash in your pocket.
But did you know that making the minimum repayments could mean that you pay off as little as $10 of the principal debt per card, per month?
Under such an agreement, a debt of $6,000 could take up to 40 years to repay.
This is only a good idea for small debts (around $500 or less) and during introductory zero-interest periods on new cards.
Myth: There’s no way to mitigate government debts
Fact: While government debts are certainly hard to renegotiate, it is not impossible.
If you have talked to a non-profit Credit Counselling service about reducing your government debts, they have likely told you that this isn’t possible.
However, the truth is that it’s just not possible to mitigate government debts with the solution that they offer.
Which is invariably a Debt Management Plan.
This is a voluntary agreement which to which many creditors are amenable.
But it cannot be leveraged against government debt.
Under a Consumer Proposal, however, you may find that you’re able to write off up to 80% of your principal debt as well as writing off any interest fees or additional charges.
You may not even have to lose any of your assets.
While filing for Bankruptcy can also allow you to have your government debts automatically discharged, many find that a Consumer Proposal is the preferred way to get debt-free within 5 years without surrendering assets that might be lost in Bankruptcy.
For a more detailed comparison between the two Click Here.
A Consumer Proposal can be applied to all kinds of government debts, including CRA debt and student loans that are over 7 years old.
Myth: You need to buy insurance for everything
Fact: Insurance can add unnecessary costs to your debts with very little benefit in real terms.
It goes without saying that banks benefit considerably when they’re able to upsell insurance policies alongside loan products.
And while they may be aggressive in promoting certain insurance products, they sometimes make sense.
For instance, it makes total sense to take out a life insurance policy when you and your partner take out a mortgage.
However, there are also circumstances where supplementing a debt with insurance does little other than making it harder to pay down the principal and eating into your disposable income.
One of the most egregious offenders is the now-ubiquitous “Balance Protection Insurance” (also known as Payment Protection Insurance or PPI) products that many banks push alongside credit cards and unsecured loans.
Fees can get as high as 1% of the balance on your card, and you may find yourself paying fees even if your card doesn’t actually carry a balance.
In the space of a single year, this charge can boost your interest rate from a reasonable 20% to an eye-watering 32%!
The selling point of these products is that should you lose your job, it covers the minimum repayments until you get back on your feet.
But very little of this will actually go towards reducing the balance outstanding.
Myth: Your credit rating is a measure of your financial worth
Fact: Sure, it’s nice to have a healthy credit rating.
But by no means is it the be-all and end-all.
The truth is that credit ratings as we know them are designed by banks as a means of gauging how profitable prospective customers are.
It’s not a measure of how financially responsible you are (or aren’t), nor is it a measure of your income or net worth.
It’s simply an indicator of how much money creditors can make from you.
This isn’t necessarily a bad thing… until it prevents people from taking advantage of debt relief measures that would help them enormously because they’re worried about the impact on their credit rating.
While something like a Consumer Proposal may remain on your credit report for up to 3 years after it has been settled, for many it is the surest way to get debt-free within 5 years.
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Struggling to make even the minimum repayments.
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Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?