How to get out of debt

It’s no secret that debt is becoming an ever-growing problem in Canada.

In September, Statistics Canada announced that the ratio of household debt to disposable income in households rose to 164.6% in the second quarter of this year. The stats may seem dire but with some careful planning and patience, debt is a hurdle that can be overcome.

Credit cards are usually the culprits of massive debt pile-ups, while other consumer loans and mortgages also contribute to Canadians’ debt-loads. It’s easy to fall behind on monthly payments associated with unsecured debt and fall prey to high interest rates taking the reins.

So, how do you tackle debt?

Use your funds wisely

First, determine how much you can actually contribute towards paying off what you owe in a month, says Debbie Gillis, of K3C Credit Counselling in Kingston, Ont. Prepare a budget to determine how much you need to spend each week on basics and how much you can spare for making debt payments.

“I don’t recommend you use all of [your extra money] to pay down your debt. You need to set some aside,” says Gillis. “It can feel like a bit of a step backwards when you need to use your credit again for everything that comes up out of your ordinary week or month.” It’s best to establish a combination of debt repayment and savings.

Strategies to pay down debt

It’s key to know that there are two strategies to getting back in the black; there’s the debt-stacking method and the debt snowball method.

Debt-stacking

The debt stacking method asks you to list all of your debts in descending order from highest interest rate first on down. This strategy requires you to make minimum payments on all of your debts while directing the remainder of your funds towards the loan with the highest interest rate. Once that one is paid off, you’d do the same to the next highest interest rate debt on your list.

“At the beginning [of using this method] it could feel like… you’re making a high payment and not making much progress,” she says. “It can feel very much like you’re spinning your wheels, that you’re not really getting anywhere.” But the longer you stick with the plan, the more you put towards your principle each month. If you stay the course with this method, it’ll really pay off.

Debt-snowball

The other method is the debt snowball strategy, which asks that you focus on paying your debts from smallest amount to the highest by making minimum payments on all your debts and putting the remainder towards the one with the lowest amount—such as a credit card, say.  Paying off a small debt can lead to a feeling of accomplishment, which is an important motivational factor for those who may feel overwhelmed by their debts. As well, the quicker you pay off a debt, the quicker you can have the extra money to apply to your next debt, says Gillis.

“If you take the emotion out of it, then the best thing to do is to probably pay down the highest interest rate debt first,” she adds. If you use this method and stick to it, you’ll pay less interest over the long term. But because it’s a slower process, it could feel discouraging. If you’re really lucky, then the highest interest rate balance is also your smallest balance. That would be the ideal scenario for the best success.

Still, if you don’t have a lot of extra money to put towards your debts, determine how much you’re paying in interest and try your best to pay the minimum payment plus the extra funds you’re being charged in interest. This way, more of your minimum monthly payment is going towards the principal amount rather than just interest, which will help you make a greater dent in your dues.

Quick tips to lower your debts

While picking a strategy is important, there are also a couple of other tips to reduce your debts. Start by checking if you’re being charged for any payment protection insurance or product warranty costs and determine whether you really need to be paying them. Interest is charged on the full amount every month, including any insurance or warranty costs, so if you nix those then you’ll be eliminating a useless expenditure that’s contributing to your debt.

Also remember that you can likely negotiate your interest rate down. All you have to do is walk into your local bank branch and ask, says Gillis. “If you’re a good customer of theirs, usually, they’ll just do it.”

And it goes without saying that you shouldn’t rely on any credit as your primary spending tool and whenever you do use credit, pay off your balance immediately.

“Credit can be handy,” says Gillis. “It doesn’t have to be the end of you.”

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