Do you remember getting your first credit card? I do.
I was 20 years old and my first major credit card was a Sears MasterCard. Yup, you read that right A Sears MasterCard. I still remember that thrilling feeling when the salesman said I’d been approved for $8,000!
The first thing I bought was an at-home weight set. I had finished losing a bunch of weight and now I could keep my workouts up at home. The set was $300 and I paid it off with my next paycheque, even before the interest was charged. I thought the whole credit card thing was easy; buy something, pay it off. Sure, that logic checks out but there was so much I didn’t know...like my interest rate.
Fast forward a few years. I just started my first full-time permanent position at the University of Lethbridge; salary, benefits, the whole nine yards. It was a big adult moment for me and my first real taste of independence. And I have to say, I loved every minute of it.
I moved out of my parent’s place into a sweet little bachelor pad. I financed my first brand new car—new car smell and all.
I thought I was killing it as an adult, so it was time for another adult purchase.
My living room was lacking something. So, I made another trip to Sears to purchase a big-screen TV. To compliment my new 55 inches of high-def greatness, I bought a slick, black glass, TV stand. All in all, that little visit cost me $4,000.
I knew I wasn’t going to be able to pay it off right away, but I had a good-paying job. I figured I would pay $100 every month and slowly pay it down over time. But, I STILL didn’t know what my interest rate was.
I loved my new TV; sports, gaming, Blu-Ray movies never looked so good. Yet, I was running out of money. Sure, I was keeping up with my minimum credit card payments and all other bills, but I couldn’t afford to go out with friends and when I did, I spent what little I had left and ended up putting overdraft on my bank account. I was constantly in the red every month.
Finally, I made probably the most responsible adult decision and took out a pen and paper to do some budgeting for the first time.
I’ll be frank. It was sad.
For the first time, I really looked at my Sears MasterCard statement and not just what I owed for the minimum payment but the remaining balance. And to my surprise, I still owed $3,850! I was confused. I had been making $100 payments for the last six months so I should be at least at $3,400, right?
Wrong. Those $100 payments were enough to cover the interest charge and only a small portion of the actual balance. Oh, what was that interest rate that I finally decided to look at? 22.99%
Here’s what I learned that evening when I decided to budget for the first time.
If you’re doing the math, after paying all these expenses I only had about $45-$60 of disposable income remaining. I was still a young adult, so that amount never went to savings or making extra payments on my credit card. Obviously, it went towards beers with the guys. And I always spent more than $60 when I went out.
Overdraft was my saviour. That was until it ran out and I was forced to use my MasterCard. This happened on more than one occasion and soon after my credit card balance rose to $5,000. This bothered me immensely. I was paying my bills, yet I wasn’t getting anywhere!
Now, I’m not going to sugarcoat things here. I wish I could tell you that I dug myself out of my credit card hole all by myself, but I did have some help and leveraged as many home-cooked meals as possible. This tactic brought my grocery budget down to $250, freeing up $150 to go towards paying my balance.
Even with that help, it wasn’t easy. That first year was the hardest. I really didn’t have a life. My nights of ‘going out’ consisted of inviting buddies over to watch the game, negotiating with them to bring over enough beer for all of us.
But, the hard work paid off. I was lucky enough to receive a couple of raises at work which helped increase my cash flow. With $300 a month extra, I not only paid down my credit card, but I also invested that same $300 into my RRSP once the credit card debt was gone. And eventually, I was able to use a portion of my RRSP for the down payment on my current home!
Can You Relate?
I’m guessing that many of you can relate to my story in one way or another. Whether you’ve personally dealt with debt or know someone who has, we’ve all been there.
Then why am I sharing this very real and personal story with you?
If my experience can help you or a loved one learn from my financial misfortunes, then I consider it a victory. Now, I’m not going to tell you how to live your life. If you want that car, go buy it. If you want to go on that beach vacation, then go. I know I would IF I could do one thing...pay it back.
As with any big purchase, you need to have a plan to pay it back. It starts first with really asking the question; can I afford to take on this debt right now?
But, as important as paying the debt back is, it’s also understanding what impact that debt will have on future purchases. If more of your hard-earned income is going towards paying down other debts then less of it is able to go towards paying a mortgage. Therefore, debt can cause delays in qualifying for a home until it is either paid down or gone.
I was lucky enough to have my MasterCard paid off before I even remotely thought about buying a home. Knowing what I know now, I wouldn’t have even qualified for a mortgage if I had that credit card still.
Manage Your Debt
The key takeaway here is to spend within your means. Again, I was lucky enough to learn that lesson when I was young and still living close to home. I mean, you’re not always going to get it right. I know for sure I haven’t.
So, what is the magic formula to managing your debt?
There isn’t one. But the good news is, you don’t need any magic. It's simple. Money comes in and money goes out. It’s what you do with the leftover is what counts.
In my case, I made a plan. I wish I would have made it before the purchase but that was an adult lesson I had to learn. I wanted to buy that TV and I had to figure out a way to pay it back.
I’m not a financial planner and I can’t tell you how to grow your money. But, I am a kick-ass mortgage broker and I know the importance of managing your debt when it comes to qualifying for a home.
If you want to get into homeownership, refinance your current mortgage or switch lenders at renewal time, then managing your debt is going to be key in securing the best mortgage for you.
I want to help you qualify for a mortgage and in order to do that, you need to be proactive about managing your debt so let's put a plan together, specific to your homeownership goals and make it happen.
I still have my TV and I’ll have a hard time parting with it after all we’ve been through. We did get rid of my epic TV stand...and because this is my story, I get to say that we got rid of it against my will.
Every time I turn my TV on though, it serves as a reminder of the importance of managing my debt...and that even after a decade, my TV is still awesome.