A couple of weeks ago, I was assisting a family member of mine, let’s call her Kelly, to refinance her mortgage. Since my income is relatively stable and above average, the bank requested that I become the guarantor in order for Kelly to refinance her mortgage. With the stricter mortgage rule and higher qualifying requirements coming into effect in early 2018, there was no way that Kelly would be able to qualify for the mortgage. So playfully signed my life away on that mortgage application.
With the new stricter mortgage qualification rules, I had to provide quite a bit of financial information to the bank. I needed to provide the last two year’s income tax returns, the latest income slip and proof of any other sources of income. Since I was trying to boost Kelly’s income numbers, I needed to provide my employment, business, investment and rental incomes. With the numbers that I provided, I thought that the application would be approved easily.
The $35,000 Surprise
A week later, the mortgage specialist called to inform me that our credit card debt was pretty high. We’d need to pay off the balance on our credit cards in order to qualify for the mortgage. I assured her that the balance on my credit cards should not be a problem as I always pay off my balances every month. In fact, I could pay it off early if needed.
As the conversation moved along, I discovered that the credit card debts were not mine. It was Kelly’s. I was totally shocked when she sent me the list of credit cards and the outstanding balances. A total of seven credit cards with a combined outstanding balance of $35,000. I pretty much exploded (what the @#$%?) when I saw the numbers and I had to call Kelly to confront her.
Bad Financial Decisions
Before the call, I was emotionally traumatized. I just couldn’t bring myself to comprehend how she had racked up such an enormous amount of credit card debt without my knowledge. As a family member, I had always assured Kelly that I will assist her if she ever needed my help. I wouldn’t turn my back on a family member if her needs were reasonable. I was very disappointed and saddened by the fact that Kelly did not reach out to me for help and I had to find out this way.
After an hour of yelling, screaming, prying, threatening and lecturing, I discovered the truth about the massive debt load. Kelly was persuaded by another family member, let’s call her Irresponsible, to withdraw money from her credit card and lend it to Irresponsible for a business venture. Irresponsible promised to pay Kelly back in a couple of months. Three years after the first loan, most of Kelly’s seven credit cards were maxed out and the outstanding balance kept on going higher instead of lower.
Conditions And Agreements
To move forward with the refinancing of Kelly’s mortgage, I had to step in and pay off Kelly’s $35K in credit card debt. There’s no way that I would help pay off this amount of credit card debt and just gave Kelly a slap on the wrist and hope for the best. Here are my conditions for helping Kelly:
- 1) She needs to hand over six of her seven credit cards to me and only keep one Mastercard with a limit of $1,000 for grocery shopping
- 2) The six credit cards that she surrendered to me will have to be canceled
- 3) She needs to pay off her one and only credit card balance every single month
- 4) She cannot increase the limit on the remaining credit card and can’t apply for more cards
- 5) The $35K of credit card debt that I paid off will be deducted from the amount that I borrow from her last mortgage financing (I borrowed $75K from the equity in Kelly’s home to invest a few years ago)
- 6) She will go after Irresponsible to recuperate her $35K
- 7) She can’t borrow from any credit card ever again. That means she cannot withdraw money from her credit card as a loan for herself or anyone else.
Once I made my conditions clear to Kelly and she agreed to the terms and conditions, I gave her one last sincere warning. If she ever violates any of the conditions in the future, I will never help her again. I will not tolerate further irresponsible behaviours.
Setting the agreement and canceling the credit cards was the easy part. So how on Earth will I be able to come up with $35K in cash to pay off this debt when I only have access to funds instead of an actual emergency fund? I don’t want to permanently carry this debt in my books either.
My Lucky Breaks
Fortunately, luck seems to be on my side. Both my wife and I received our annual bonuses the day prior to this mess. In previous years, all of our bonuses were contributed to our RRSP accounts, but we already maxed out our contribution room this year. Hence, we had to receive the bonus in cash, the first time in nearly ten years.
The second lucky break that I got was the capital gains from the options that I had been selling throughout the year. I had built up a large five figure capital gain and needed to sell some loser stocks in my investment account for tax loss harvesting. The proceed of the stock sale along with our bonuses were sufficient to cover the credit card debts.
Takeaways And Lessons Learned
With this fiasco, there are a few takeaways and lessons to be learned. I hope that none of my readers will ever get into this mess. Here are a few reminders to keep you out of debt trouble:
- 1) Always pay your credit card balance in full every month
- 2) Never put your financial health at risk to help someone fund an unproven business venture
- 3) Credit card borrowing is one of the worst forms of loans. Most of the time, you’ll be better off by not borrowing
- 4) Before you lend money to anyone, always ask, “will you be able to pay for the loan if your borrower cannot? Are you willing to pay for someone else’s mistake?” If the answers are no, then you shouldn’t be lending money to that person
- 5) If your borrower has a bad history with their finances, by lending them money, you will be supporting their irresponsible behaviours. For your own sake and theirs, don’t do it
The Results Of A Strong Financial Foundation
On the other hand, this fiasco also demonstrated that some of the steps that I had taken to build a stronger financial foundation for myself worked beautifully. Here are a few tips to help you build a stronger financial foundation:
- 1) Always build access to funds regardless if you need to use it or not. It’s best to get access to funds before you need it
- 2) Access to funds is just as good as an emergency fund
- 3) With a strong financial foundation, you can help both yourself and people around you
- 4) When it comes to financial decisions, sometimes you have to use both your heart and your head to make the decisions. There needs to be a balance. Will you be happy if you have all the money in the world and no family to enjoy it with?
- 5) Money is a numbers game. The better you are at it, the easier it is for you to use it towards your advantage
My Two Cents
When people don’t understand compound interest, they are putting their finance at risk while borrowing against high-interest loans. Compound interest can work for you (when you invest) and against you (when you borrow). Debt is a very powerful tool. If one use it irresponsibly, there will be consequences and it will impact your financial health in the long run. Be money smart. Live within your means. Only borrow when you need to not because you want to.
So readers, what’s your view on credit card debt? Do you pay off your credit card balance in full every month? If you are debt-free, do you have any tips to help others pay off their debt faster?
About Leo
I have learnt from my family’s’ experience and told myself that I will never get a credit card and also a loan if I know that I will not be able to make the payments. It usually is tempting when you see what you’re being offered and how nicely they like breaking it down on what you would be paying but just for me to stay sane, I have decided not to get any.
@Joan, these are really great money habits to have. I am glad that you have the discipline to say no to all these temptations. This is what got people in trouble when they can’t say no to offers.
Woah! I am so thankful that I have good credit. Learning from past mistakes has made me extremely financially conscious.
@Jessica, sometimes it takes a few bad experiences for people to learn a valuable lesson. I hope that Kelly will learn her lesson this time and protect her credit and finances.
How lucky that your family member has you and was able to help, I have credit card debt which is only a few bobs but debt is debt and I intend to clear it all this year and be done.
@Anosa, the faster you clear off those high interest debt, the more money you’ll save. Don’t hesitate. Just do it.
I guess you won’t really know your relatives until you co-sign for them. I have never done this in the past and most likely will only do it for my children. With co-signing, there are a lot of risks involved with so little reward. Just make sure that that family member makes the payment and on time. Remember that one missed payment will show up on your credit. I’ve also heard of family relationships ruined. I’m pretty sure that you know what you’re doing and really commend you for helping a relative. Nothing wrong with helping a family member in need. Best.
@Bernz, you are definitely right on the co-signing part, there are very little benefits and mostly risks. Hopefully, this is the last time that I have to do this. I don’t think I can do it another time.
This is fabulous advice. If we use our credit card, we ALWAYS pay it off the following month. If we can’t afford something, we don’t put it on the card. I hate being in debt.
@Amber, only buy what you can afford is a great strategy to manage your money. It’s so sad that so many people don’t understand this concept. Maybe this is why there are so many credit cards out there.
These are great tips! I always try to spend only what I can afford now to avoid huge debts like Kelly’s.
@Ann, “spend only what you can afford” is a great philosophy. I couldn’t preach any better than this.
Wow thats a tonne of credit card debt and for cash advances? Wtf. She better ask her friend for interest as well. Nice that you were able to pay off the balances no problem. Im sure you know what your doing but might get annoying monitoring her finances. I dunno if i would co sign for anyone other than my kids if need be. As dave ramsey says the borrower is always slave to the lender……
Nice of you to help her out though!
Cheers
@PassiveCanadianIncome, my head said no, don’t do it. But my heart said, it’s your family, if you’re not going to help, who would? I hope that I don’t have to resort to monitoring her loan payments.
35k?? Wow, I can’t even imagine! I have never been in debt, and I don’t plan on it in the near future!
@Cathleen, good for you for being debt-free. However, I don’t think that all debts are bad like a mortgage or investment loan.
I pay off all credit card debt immediately. My husband and i also payed off 300k in student debt from his schooling in six months. We decided to live poor and pay our debt and not let the interest accumulate. Best decision ever. We have a thirty year loan on our home we just bought but have a six year plan to pay it off. We’ve been financially blessed but at the same time we are very smart with our money and live frugally to save for retirement. Great tips here.
@Jeanette, give yourself a great pat on the back. Paying off $300K in student loan debt in six months is no easy feat. Now you are making me curious about how you and your husbands are able to pay off such a huge amount of debt in such a short period of time.
Wow, that is crazy! I am not in a place to loan anyone money as I’m able to pay for all of my necessities and no more so I would never put my financial state in jeopardy for someone else at the current time.
@Christina, putting your finances on the line for other has always been a very touchy topic. I’ve got a really good reason for doing it and I hope that the people I help will appreciate it.
Credit cards are so evil! I have learned it the hard way too. Good thing you and yor wife received your bonuses on time!
@Emman, yep. We were pretty fortunate to have received our bonuses at the right time and we put it to great use. I just hope that we don’t have to do it too often.
That’s quite the story, Leo! I know ppl who rack up that amount of debt. I also have family members who don’t pay off their high interest cards like 20% bc they believe they can beat it by buying stocks like weed, Amazon, fb, etc. They think they can get over 100% return and that it’s stupid to pay off 20% cc. I’m like… wtf?? They actually think that way??
I’m Wondering… does your family member know you blog about this? Lol
@Fin$avvy Panda, from what I am hearing, those people are pretty much using their credit card to fund their gambling venture. At least they are not borrowing money from loan sharks. In the long-run, I don’t believe there will be many successful investors with a 20% investment cost. I just hope that they know that their interest expenses are tax deductible.
I’m on my 30’s but never had a credit card. I don’t want to have one, maybe I was scared and learned from our family experiences. I always believe that – spending reflects on your lifestyle not your income.
@Angel, I love this thought, “spending reflects on your lifestyle not your income.” If more people realize that, we’ll have less people struggling and live paycheque to paycheque.
Too many people spend way over their means and then get into financial trouble. It sounds obvious, but you should only ever spend what you can afford – and besides, saving up for something and then buying it is far more rewarding….
@Louise, I definitely agree with you that we should save up for something and then spend it. This is why I created a vacation fund to save for my vacation before I spend the money. It’s a great way to reward yourself.
Wow what a powerful story we all need to take a minute to think about. I agree it’s so important to have access to funds, we never know what might happen
@Maayan, I realized from an early age that a great indicator of your financial health is how much access you have to funds. Having access to about $50K to $100K in access to funds can definitely help you weather about 98% of any financial emergencies that you may have.
oh em gee this would be my worse nightmare! I am so glad I am debt free! I don’t even have a credit card. but it is great to learn all these!
@Corinne & Kristy, congrats on being debt-free. I sometimes wonder what life would be like if I don’t have any debt at all. Must be a great feeling I bet.
Some people really need a strict hand when it comes to credit. They treat it like money they have; it is not!
@Angela, you are absolutely. Most people get into credit trouble because they think that the money that they spent were money that they have. In reality, it’s money that they don’t have.
Wow what a situation. It sounds very similar to my moms only hers was racked (unlawfully) by a family member but we were able to get it fixed for her but it was a nightmare to deal with.
She’s lucky to have someone help her out and set her finances straight. A debt that huge is tough to put out and you’d have to adjust your lifestyle and live within your means.
Nice tips! If I get something with my credit card then I make sure I can actually afford it. I pay it off super quick. I don’t like making the same mistakes twice.
This is great that you were able to make her commit to sticking to your terms. I have $2K in credit card debt and will pay it off before taking any more on.