How this 30-year-old paid off nearly $50,000 in debt

It was a wake-up call nearly $50,000 in the making.

Between three credit cards, a line of credit, personal loans from friends, account overdraft and a car loan, Eduek Brooks had found herself with tens of thousands in debt hanging over her head — $47,328 worth, to be exact.

Brooks, now a financial educator in the Greater Toronto Area, began experiencing “lifestyle creep” soon after she secured her first “big girl” job. She had been working minimum wage jobs during a 22-month wait for her permanent residency after finishing her master’s degree in chemical engineering. Brooks left the engineering field last year.

“I wasn’t actually being mindful of what was coming in and what was going out. I was thinking, ‘I’m going to get a paycheque next week and put it on the credit card and pay it off,’ and it just kind of spiralled out of control where I had all this debt and wasn’t able to pay it off,” Brooks said.

In 2018, with her 30th birthday looming, she decided to enter the new decade with a clean financial slate and start building her wealth. Then she was laid off.

But that set back turned out to be great motivator.

“It was the final push,” Brook says. “I thought I never want to be in this situation again where I have all this debt and I don’t have any savings.”

Paying down debt is a challenge even in the best of times. But, for those facing consumer debt right now, and especially debt with a variable interest rate, the Bank of Canada’s recent rate hike will make the burden even more challenging.

On July 13, the Bank of Canada increased its benchmark rate by one percentage point, the biggest rate hike Canada has experienced in 24 years. This increased the key interest rate to 2.5 per cent, meaning prime rates also increases. So Canadians will be paying more each month on any money borrowed with a variable interest rate. This means that less of those debt repayments will be applied to the principal — the initial amount borrowed for the loan.

Mortgages, home equity lines of credits, certain personal loans, and student loans can all have variable interest rates.

“For a person paying a line of credit off and making minimum payments, their payments are not stretching as far and their payments are also increasing,” says Gursharon Singh, customer experience manager at Credit Canada Debt Solutions. “So it’s a twofold impact on a household budget for an individual.”

Since credit cards have fixed interest rates, they’re not directly impacted by the Bank of Canada rate hike. However, if you have missed minimum payment deadlines and carry a revolving balance, meaning you carry your balance forward each month by only making minimum payments or none at all, a lender can increase the interest rate by up to five per cent, Singh says.

“The overall Bank of Canada interest rate hike does put the pressure on creditors,” Singh says, adding the credit card interest rate increase is something consumers usually are not aware of this until it happens to them.

Should everyone with consumer debt be concerned?

That depends on the degree of debt held relative to disposable income, says Jason Pereira, partner, senior financial planner and portfolio manager at Woodgate Financial Inc.

There’s a large cohort of Canadians whose disposable income is less than their consumption. In previous years, they racked up credit debt and then slapped it on a line of credit or refinanced their mortgage, Pereira says.

“That game is over now, he says. “The credit card, to line, to mortgage game of musical chairs was dependent entirely upon housing prices increasing so they could leverage that increased equity. With prices dropping that game can no longer be played.”

“It always comes down to consumption,” says Pereira. If you continue to spend more than you take home, your situation is just going to get worse. “You basically need to act now and you need to act fast,” he says.

Brooks began her debt repayment journey by listing everything she owed on a spreadsheet and determining which debt to pay off first. She started with quick wins — a credit card with a $1,217, a $1000 in personal loans from friends and $500 in overdraft. “For me, it was just based on the debt I wanted to see go the most,” she said.

She created the Instagram account @twosidesofadime as an accountability page and to track her progress and gave herself three years to get debt free.

Brooks found another job in her engineering field that required a lot of paid overtime which helped accelerate her debt repayment. She also became an Uber driver for more extra cash.

Cutting her budget also made a big difference. Brooks slashed her skin care budget by a third, stopped buying clothes and started making her meals at home. She also renegotiated her phone and internet plans to lower costs.

Singh says depending on how deep the debt hole is, it may be time for more creative solutions.

Reducing the number of vehicles in your household is one place to start, says Singh. As is pooling expenses, such as joining a car pool, taking advantage of group discounts and in more extreme cases, moving in with family or finding a housemate.

“People who are carrying high balances on credit cards really should consider some type of debt solution or some option within their situation that would allow them to get a break in that interest, whether that be looking at a consolidation option or looking to family to see if someone would co-sign a low interest loan so they can pay off that higher interest balance,” Singh says.

Debt management programs through credit non-profit counselling services can reduce and eliminate interest on repayment, she adds. The drawback is these solutions have a temporary impact on a personal credit rating.

“However, if there’s a time to compromise that rating, it would be now,” says Singh. “The bank is making it very expensive to borrow. It’s important to have good credit when interest rates are low. That would be the time for strategic borrowing.” Singh says.

There’s also insolvency options which are more formal, such as a consumer proposal and bankruptcy for when there is increased hardship. These also have a negative credit rating impact, Singh says.

By remaining diligent, Brooks paid off her debts in just 20 months in 2020. She now uses that same Instagram account @twosidesofadime to share her financial take-aways.

“I don’t think I’ve ever felt freer in life. It was just that feeling of peace and calm knowing I did something so huge,” Brooks says.

Her advice to others?

“Stop the bleeding.”

To avoid getting into trouble with debt in the future and make sure she didn’t get in further debt, Brooks stopped using all her credit cards and her line of credit and she switched to a prepaid Visa card to better manage her spending.

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