Live debt-free: Household Debt in Western Countries

In 2013, it seemed that news of household debt was more prominent than ever. Since then, I’ve been paying closer attention; the quarterly news reports on household debt kept growing and have become more alarming. It made me furious that our governments don’t seem to wish to curb inflation, and protect low income earning citizens by, for example, putting a cap to housing and rental prices.

How on earth should the average citizen be able to stay afloat? It is bad enough that real estate prices keep ballooning out of control; food prices are climbing steadily too with no relief in sight. According to financial reports and statistics, the cost of groceries is up 5% from the previous quarter.

Rentals, even for older neglected buildings, are happily riding the gravy train; if real estate prices are going up, why shouldn’t landlords increase rental rates as well, and benefit from the upward market trends. Never mind if some properties haven’t been kept up and look more like dives. That this may place a number of tenants in an impossible financial situation isn’t their concern! Hats off to those landlords who resist such parasitic gouging practices, and choose to keep their rental properties affordable and well maintained.

With household debt at an all-time high ($1.64 spent for every dollar earned), the smallest increase in the cost of living sends many families and low-income earners into a financial tailspin with little hope of recovery.

What are we to do?

For one, it’s imperative to reassess our true costs (housing, car loans, insurances, food, staples, healthcare, communication, media). Can we realistically shave, trim down and save dollars? You’ll be surprised to find out that indeed you might be able to do so once you’ve taken stock of your present financial situation.

The other aspect is looking at how we use our credit cards. When the cost of living goes up, so does our reliance on credit cards. A quick fix would be to resort to using our credit cards when we can’t pay the bills; the reality is that we still cannot pay those same bills in the months ahead and therefore using our credit cards only puts us deeper into debt.
Reassessing alone without taking action though, will not secure debt-free living; it will, however, help us understand our problem areas, and start easing the way towards a debt-free and empowered lifestyle. We will explore this and possible root causes in future posts.

TIP: Have a look at your credit cards, including department store cards. Check and list the interest rate on each. They’ll probably fluctuate from 16% to 21%, very high, right?

Here’s what I did: I had two major Canadian credit cards and one US$ credit card. The Canadian credit cards earned bonus points and charged high yearly fees. The interest rate on all cards was 18%. I called my first local bank where I held one card, and asked to cancel the credit card, after I had paid a small outstanding balance with my other card. The bank representative explained that I would be throwing away 9 years of perfect credit (I did make payments on time). We chatted back and forth and reached a compromise; in order to keep my credit standing, the bank would issue a no-fee basic credit card with a limit of $500. This card would be used for emergencies. Once I received the card, I placed it in a secure place and haven’t had to use it yet. I’ve had the card for over 10 years.

Next I called the other financial institution I had an account with, and asked to lower the interest rate on that card. At first the representative said that it couldn’t be done. I knew it could and I challenged him. He then explained that in order to have a lower interest rate card I needed to switch to another product. I replied that I was okay with that and mentioned I wanted a no-frills card. He suggested a 15% interest rate card and I said that it was still too high. The agent countered that I wouldn’t be able to earn any bonus points, as basic cards offered no benefits. I replied: “What good are bonus points to me if I keep carrying a balance, which in fact erases any benefits those points might give me. If I have a basic credit card, the lower interest rate will make it easier to pay off the balance and then I’ll be able to save and afford those trips the bonus points brag about.”

The agent couldn’t really argue with that and offered me a no-frills card at a rate of 11%.
On outstanding balances, this was a 50% savings! As a result, it took me only a few months to pay off the balance and now, whenever I use the card; I pay off the balance at the due date. The US$ card I simply cancelled as it didn’t really offer any advantages.

In the end, I opted to keep two cards: one to maintain the perfect credit score and which I stored as mentioned above. The other I use for online credit card only purchases.

You can do this too!

First: start making a list of the banks and companies with whom you have credit cards. Especially department stores cards, which charge the highest interest rate. Cancel the department store cards – those reward points and 10% instant discounts at the till are smoke and mirrors. When you’re unable to pay the full balance at the time you receive the statement, you’ve lost more than 10% in interest! Don’t let them talk you into keeping your cards, make yourself deaf to the benefits and extra bonus discounts you may loose out on.

Next: cancel your other cards and keep one – since things like online travel tickets, and other purchases don’t offer payment options except with credit cards.

Make sure you negotiate a lower interest rate for the card you decide to keep or shop around for a credit card with the lowest interest rate, cancel all others or be selective like I noted above.

Be prepared that bank representatives are going to dissuade you and say that lower interest rates can’t be done – YES they can! Don’t take no for an answer.

I wish you success! Let me know how you’re doing.

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