Debt crisis: 5 errors that worsen the situation (and how to avoid them)

Bills and credit card balances, rent and groceries… You no longer know what to prioritize and you’re feeling increasingly stressed and overwhelmed. When you lose control, you can easily make choices that could worsen an already difficult financial situation rather than improve it. In order to regain control of your debt and finances, you should avoid the following common errors.

1. Ignoring your bank statements and bills

When you’re short of money, denial is a natural reaction. You don’t open your mail. You let emails pile up. You hope that things will improve. However, the longer you wait, the worse it can get. Both interest and penalties will continue to pile up and your creditors will become increasingly insistent.

Here are a few tips to avoid late payment penalties:

• Even if you’re dreading it, read your emails and bank statements.
• Take time to list your upcoming payments.
• Note any important dates in a calendar or application.
• Prioritize your payable invoices (housing, electricity, groceries, etc.).

2. Using credit to repay other debts

Borrowing to clear other debts (known as kiting) is essentially robbing Peter to pay Paul. It’s a tempting short-term solution, but you’ll get further into debt. Using a second credit card or line of credit to make the minimum payments on a credit card just kicks the problem down the road. And interest will continue to grow.

Here are a few tips to avoid accumulating debt:

• Where possible, avoid using credit.
• Reduce your debt by transferring your credit card balance to a card with a lower interest rate. Once you have done this, destroy your old high-rate credit card to avoid being tempted to use it.
• Make an appointment with your bank to see whether you’re eligible for debt consolidation.
• Prepare a realistic repayment plan. You may find our financial health check tool useful for determining how much you can set aside each month to repay your debts.

3. Paying off bad debts first

A common error that people make is paying off small debts first because it’s satisfying, but they neglect rent, electricity bills and high-interest debts. As a result, you pay even more in the long term and risk serious consequences.

Here’s some advice:

• Sort your debts based on their interest rates and consequences in the event of non-payment.
• Always prioritize housing, public utility bills and high-interest debts.
• Try using the “avalanche” method which involves paying off high-interest debt first.

4. Remaining silent and isolating yourself

Many people have money troubles. However, they keep it to themselves because they’re afraid or ashamed. But that only compounds the problem.When you don’t share your worries, you become increasingly stressed and isolated. You also waste precious time hiding the situation instead of seeking help.

We suggest talking to someone you trust as soon as you feel under pressure and getting it off your chest.

5. Waiting too long before consulting a professional

The longer you wait, the fewer options you’ll have. When creditors start calling you and providers threaten to cut off services or take legal action, you may have waited too long.

Here’s some advice

• As soon as you feel like you’re losing control, it’s time to consult a professional such as one of our Licensed Insolvency Trustees. They’ll explain all the solutions available to you.
• Your first no-obligation meeting is free of charge, and, most importantly, judgment-free.

In a nutshell, take action early to regain control

Nobody wants to experience a debt crisis. However, ignoring the issue won’t resolve it. On the contrary, taking the first step, no matter how small, can put you on a different path. You don’t have to tackle this on your own. Help is available and you have the right to ask for help.