Almost every adult has some form of debt.
Whether it’s a residential mortgage, a credit card or vehicle financing, we rely on credit to facilitate essential purchases.
However, debt can quickly escalate, and it doesn’t take long before it becomes unmanageable.
Even when you’re up to date with your repayments, only paying the minimum monthly amount could see your debts rise, rather than fall.
Without a proactive approach, the costs of doing nothing will soon become apparent.
To understand why it’s so important to tackle your debts head-on, take a look at the disadvantages associated with ignoring your debts:
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1. Increasing debt
If you’re able to make minimum monthly payments, you probably assume that you’re gradually reducing your debt and it will be paid off over time.
Unfortunately, this isn’t always the case.
With credit card debt, for example, the monthly interest can easily exceed your minimum monthly repayment.
This means your total debt will actually increase every month, even though you’re meeting your contractual requirements and making a payment when it’s due.
Take a look at the following example:
You have a credit card with a limit of $1,200 and a balance of $1,000.
Your minimum monthly repayment is $20 and your APR (interest rate is 24%).
Paying the debt off this way would take approximately 11 years and you would pay around $1,619 in interest.
That means the total you would pay back is $2,619 and you’ll be carrying the debt for more than a decade.
However, if your interest rate increases or the Bank of Canada base rate increases, the monthly interest on the card will also rise.
If your monthly interest is higher than the $20 minimum monthly payment, your account balance will increase every month.
Remember – you have a balance of $1,000 and a limit of $1,200.
Every time your balance increases, it takes you closer to this limit.
Even if you don’t use the card, it’s only a matter of time until you hit your limit.
If you exceed it, you’ll be required to pay additional charges every month, as well as the monthly interest on the balance.
As you can see, it’s remarkably easy for debts to spiral out of control in this way.
Simply paying the minimum monthly repayments on your accounts isn’t a sure-fire way to actually get out of debt.
Even if you can successfully pay the debt off in this way, it’s likely to take you years to do so.
2. Missed opportunities
When you’re paying debts off for years and years, it eats up any disposable income you might have.
Most people have more than one credit card, for example, and it’s not uncommon for people to have a number of personal loans, financing agreements, store cards and even payday loans too.
If you’re in a substantial amount of debt, all of your income is going to go towards paying for essentials, like food and utilities, and paying off your debts.
During this time, you won’t have the funds for any luxuries, such as gifts or holidays.
What’s more, you won’t be able to take advantage of great savings rates or investment opportunities either.
Investing even a small amount of money each month can be a viable way to save for the future and build up some capital.
However, on-going debt problems often make it impossible for people to take steps to safeguard their financial future.
3. Financial crises
When you fail to do anything to address your debt problems, you can’t prepare for financial emergencies.
As these happen to everyone from time to time, you will face unexpected expenditures at some point or another.
A broken vehicle may need to be replaced so that you’re able to commute to work, for example.
Alternatively, you could lose your job and struggle to find another.
You may even find that your expenditure goes up because of a rise in taxes or an increase in your rent.
We don’t always know when a financial emergency will strike, which is why it’s important to be prepared for any eventuality.
When you’re struggling to deal with your debts, of course, it’s unlikely you’ll have the funds to contribute towards an emergency savings account on a regular basis.
When disaster does strike, your on-going debt issues mean you won’t have the funding you need to cover the extra costs you’re incurring.
If you have a substantial amount of debt, you probably won’t have the borrowing power to access more credit either.
As a result, you’ll be facing a financial crisis with no clear way to resolve the issues you’re facing.
Taking a Proactive Approach to Debt Management
Ignoring your debts isn’t a viable option if you want to safeguard your future.
Even if you haven’t missed a payment yet or your monthly repayments seem fairly manageable, it’s important to plan for a variety of situations.
If you wouldn’t be able to cope with a necessary but unexpected cost, for example, then you’re not in a great place financially.
Fortunately, there are ways to turn your situation around.
By addressing your debt problems and finding a more effective way to pay off your loans, credit cards, payday loans and store cards, you can reduce the burden you’re under and create a financial plan that works.
Contact Bankruptcy Canada Now
When it comes to debt, the costs of doing nothing aren’t just financial.
On-going debt problems can have a major impact on your wellbeing.
The constant stress and worry associated with escalating debt can exacerbate health problems and damage your relationships too.
If you want to avoid the negative consequences associated with debt, talk to someone about your financial situation today.
At Bankruptcy Canada, we have more than 20 years’ experience helping people to overcome financial issues and we can help you too.
Call us now on (877) 879-4770 and talk to someone in confidence today.
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