HOW DOES A CONSUMER PROPOSAL MAKE A DIFFERENCE?
Your Minimum Payments are almost 100% Interest.
When we examine people’s debts, the largest single portion of their payments goes to interest.
Depending on the type of credit card you hold, interest rates typically range from a low of 19% to a high of 33%. Compared to today’s Bank of Canada Interest Rate of 2%, the rates charged by the major credit cards are 10 to 15 times what it costs them to borrow.
If you are struggling to make or are just making the minimum payments, on your credit cards, you are into a LONG TERM repayment plan! If you make only the minimum payments, which are typically equal to 3% of your outstanding balance, it will, again depending on the card you use, take you anywhere from 20 to 35 years to pay it off, and that is only if you don’t use your cards again over those same 20 to 35 years. Making payments on your credit cards for 25 years and never using them again is a scenario which is extremely unlikely to happen.
Where can I find out how long it will take me to Pay off my Debt?
The payment timeframe seems unbelievable, but if you examine your credit card statement, you will see exactly what we mean. By law, each credit card company must disclose on your statement how long it will take you to pay that statement balance off, making only the minimum payment each month. We encourage you to pick one or more of your statements, and see what your payment timeline will be.
Don’t be surprised if it takes you a little time to locate it on your statement, as the Credit Card companies don’t seem to want to put it in a place where it jumps out at you.
How can a Consumer Proposal Change my Situation?
If you are not making any headway or you are falling further and further behind with your credit card balances creeping up, a Consumer Proposal may be the best option for you. In order to highlight the benefit of a Consumer Proposal, we need to look at an example.
Let’s say you owe $50,000 in credit cards and that the interest rates on your credit cards average 25%. That means that you will pay $12,500 in interest each year, just to tread water and maintain the balance. That works out to $1,041.67/month, and you still have to pay the principal portion of the debt off. Typically, the credit card companies want you to pay 3% of the outstanding balance each month, in this case, $1,500.00/month.
In a Consumer Proposal, ALL INTEREST is forgiven, and you only have to make payments toward the principal. If you pay the $50,000.00 off in equal installments over 5 years, or sixty months, that is only $833.33 ($50,000/60) a month.
Pay $833.33 for 60 months, or struggle to make your minimum credit card payment for 25 years, while at the same time, never using the credit card again. By comparison, it’s a “no-brainer!
The Benefit of a Consumer Proposal is impacted by your ability to make extra payments.
If you can make lump sum payments or can afford to pay more than the minimum on your credit cards each month, the comparative impact of 0% Consumer Proposal vs. a 25% interest rate credit card diminishes. If you pay the entire balance of your credit card off each month, the interest rate on the card will never matter, as you are never going to pay interest.
A Consumer Proposal is really suited to someone caught in a minimum payment scenario, or situations where your minimum payments are falling behind, or when you get ahead slightly, only to charge your credit cards up again, and nothing really changes.
