consumer proposal,  credit cards

A Millennial banker is $33,000 in debt – what are his options?

29M in GTA with maxed $8,000 RBC Visa @ 20.99% and $25,000 RBC LOC @ 12.5%.

Started university later in life and was living out of family home with no outside help so incurred this debt in the last 5 years or so.

Finally finished school and am working as a paid intern at a big 5 bank in DT Toronto but currently only making $53,500/yr and interest is killing me.

No assets or savings.

At this rate I’m never gonna get this paid off so considering a consumer proposal.

Is this my best option? Any help appreciated!

Victor Fong, Licensed Insolvency Trustee responds:

LIT here. In reference to your post:

At this rate I’m never gonna get this paid off so considering a consumer proposal. Is this my best option? Any help appreciated!

You have a number of options depending on: (1) your credit score; and (2) how much money you have left over to service your debt payments after you’ve paid your living costs like rent and groceries:

Consolidate your debt with a new loan

For example, you can apply for another unsecured line of credit to pay off the $33,000. This would only make financial sense if the interest rate you can get from your new LOC is significantly lower than the average interest rate you’re paying on your total debt.

I calculated that the average interest rate you’re paying on your $33K is 14.56% using this online calculator.

Mathematically, this is how the average interest rate is calculated on your $33K of debt:

$8,000/$33,000 x 20.99% = 5.09%

$25,000/$33,000 x 12.50% = 9.47%

5.09% + 9.47% = 14.56%

The interest rate for an unsecured LOC at RBC is currently at about 10%.

If you were to pay off the old debt with your new LOC and subsequently paid off the new LOC over 5 years at 10%, your monthly payments would be $701 per month.

Therefore, if your credit is good enough to qualify for such a loan and you have enough cashflow to pay $701 per month after your living costs, this would be the solution to your situation.

Avalanche method of paying off debt

If consolidating your debt with a lower interest rate loan isn’t in the cards, you can see if the Avalanche Method of paying off your debts works for you.

Assuming you have enough money left over after paying your living costs and the minimum payments on both your RBC Visa and RBC LOC, focus your excess funds on paying down the Visa as quickly as possible, as it has the higher interest rate. Once you’ve paid that off, focus your financial resources on the LOC until it’s paid off.

Consumer proposal

If the two options described above aren’t possible, you should consider filing a consumer proposal.

Based on your net income, the fact that you have no assets and assuming you’ve never been bankruptcy previously, a reasonable CP would be $250/month x 60 months = $15,000.

Your credit will be negatively affected and assuming it takes you the full 60 months to pay off your CP, it’ll stay on your credit history for 6 years after the date of filing.

However, you can start rebuilding your credit score after your CP has been approved by your creditors using the 2/2/2 method:

  • 2 secured credit cards (e.g., Home Trust Visa and Capital One Secured Mastercard)

  • 2 years repayment history

  • Credit limits of $2,000 each

Hope this helps. Good luck 🤞

 

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With many years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. so that he could dedicate his professional life to help people from all walks of life to deal with their debt.