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?