Debt can be a useful financial tool. Loans can help you buy a car or a home. And if you use credit cards, you can sometimes collect other benefits like travel miles or points you can spend. However, too much debt can make it difficult to save money and limit your financial options now and in the future.
Any money you’re putting toward monthly debt repayments isn’t going toward your savings. The sooner you pay off your debts, the sooner you can put your money into savings or an investment that will earn you interest.
How to determine how much you owe
There are many reasons why debt can accumulate. Debt can add up because of changes in interest rates, changes in your cost of living, or changes to your own spending. The more debt accumulates the more stressful it can become.
If the amount of debt you have has started to feel overwhelming, that’s a sign to take action.
A good first step in tackling your debt is to get a clear picture of how much you owe. You can do this on your own or with the help of a financial professional. Adding up what you owe could include:
- Gathering your monthly statements for your credit card(s), line of credit, mortgage, loan repayments, and any other information that tells you about your debt.
- Making a list of each of your debts and how much you are paying monthly. You can make the list in order of total amount owing, or by the interest rate you’re paying on each debt.
- Adding up the total monthly amount for all your debt repayments and comparing this against your budget.
Just getting this far is an important step. And it can be a big personal accomplishment. It’s also a good moment to consider what next steps make sense for your situation.
What steps can you take to reduce debt?
Once you have a clear picture of how much you owe, you may have a better sense of how to tackle your debt. It might also tell you how urgent the situation has become. If your debt seems manageable, following some of these money management steps might help:
1. Reduce spending
It’s always a good idea to double-check your monthly expenses to see if there’s anything that can be adjusted. Take a look at your last few monthly bank and credit card statements to see where your money is truly going.
It’s possible you’ll discover you’re already doing your best, and there isn’t much else to cut back on. But if you can find even $25 worth of monthly savings, it could make a long-term difference. Imagine putting that $25 towards one of your monthly debt payments instead. It could help you pay off that debt much faster.
If you are considering cutting monthly contributions to your retirement savings or other large investment goals, it may be better to continue with smaller contributions rather than none at all. Speak to your financial advisor if you need support on managing your financial goals.
2. Avoid accumulating new debt
It’s hard to repay what you owe if you’re continuing to add to your debt each month. It may be wise to put away your credit cards for a while. Or only use your credit cards for expenses you can pay off in full. You may want to try a cash-based approach for everyday purchases. You could also use gift cards that you might have been saving for a rainy day. And you might want to challenge yourself to a month with no online shopping. See what strategies work best for you.
You can tackle debt decisions as a family as well. Have a discussion about needs versus wants to see what you could prioritize and cut back on. And if you’ve never tried tracking your expenses before, now is a great time to start.
3. Increase your monthly payments
It’s a good idea to at least pay the minimum amount you owe each month. This will help protect your credit score. However, it’s even better if you can pay more than the minimum amount. If you can pay more than the minimum it will take you less time to pay off your debt.
You could consider setting up automatic payments timed to when your paycheque arrives If the money is withdrawn from your account automatically, you won’t have a chance to spend it.
The amount withdrawn could go into a separate account that you use for debt repayments. Or it could be automatically applied to the debts you’re repaying.
Try our Pay off Credit Cards and Debt calculator to calculate how long it will take to pay off your debts.
4. Pay off the highest interest rate debt first
If you can afford to pay a little more, consider focussing on the loan with the highest interest rate first. Your biggest loan may not cost the most. For example, your mortgage may be the biggest debt you have, but it’s likely the cheapest as far as interest rates.
To figure out which debt is costing you the most, look at the interest rate you’re paying, not how much you owe.
For most people, credit cards are a good place to start. If you work to pay off your credit card debt, your balance will gradually gets smaller. And the total interest you owe each month will also get smaller.
You might consider keeping a list. As you pay off each debt, you can start paying more on the next debt with the next highest interest rate.
5. Pay off the smallest single balance first
This strategy involves focussing on your smallest debt. You pay it down aggressively until it is eliminated. In this case, you gain a sense of accomplishment by completely removing one debt from your list. And then you can focus on the larger debts with your renewed confidence from paying off the smaller one.
The strategy can be risky if you have high interest debt that could accumulate more interest in the time it takes for you to pay off the smaller loan. It may be best to tackle the high interest debt first if the interest on it would be more than what you repay on the smaller debt.
6. Find ways to reduce your interest rate
Debt accumulates because of the interest charged on what you owe. It adds up faster when the interest rate is high, or when it takes a long time to pay it off.
Take a look at your debts ranked by interest rate. See if there are options to reduce your interest rate. For example, if you have high interest credit card debt, find out if you can switch to a lower interest rate card.
Or, if you have a mortgage, you can talk to your bank or lending institution to find out about refinancing options. If you have a good record of paying on time, they may be willing to reduce your interest rate to keep your business.
7. Consider a consolidation loan
A consolidation loan groups your multiple debts into one loan. It can be an advantage to keep track of one loan instead of many. And you usually pay less overall interest on a consolidated loan so it costs you less to pay it off. Keep in mind that this approach works best if you stop accumulating debt while you are paying off the consolidation loan.
Two common consolidation loan options are a home equity loan or line of credit. The interest rate will be lower. But remember that if you use your home equity as a loan, you could lose your house if you can’t keep up with the payments. Speak to your bank or credit union to find out more about these options.
Our debt consolidation calculator can help you see the difference of consolidating multiple debts into one repayment plan.
8. Talk to a professional
If you’ve already tried tried debt reduction strategies like the ones above, and are still struggling, there are professionals who can help.
You may wish to hire a financial planner with experience in debt management issues. They usually charge an hourly rate for their services. You may also consider working with a credit counselling agency to determine if your needs can be met by a debt repayment plan, or if a consumer proposal or bankruptcy process would be necessary.
Not-for-profit credit counselling agencies help people work through their debt problems. They can help you develop a plan, reduce your interest costs, and get out of debt over time.
The Government of Canada has information about these types of services including:
- Getting help from a credit counsellor
- Dealing with a debt collector
- Getting help from a licensed insolvency trustee
The Financial Consumer Agency of Canada issued a consumer alert on practices consumers should watch out for if they’re looking at getting help paying off their debts or repairing their credit.
If you’re planning to meet with a debt professional, a good first step includes finding out the services they offer and the cost. This includes any fees associated with the first meeting or with assessing your situation.
There may be times when repayment is impossible. In those cases, bankruptcy may be the only way out. But there are many drawbacks. For example, your credit record will contain this information for six years or more. Consider bankruptcy a last resort. And be sure to get expert advice.
Debt can accumulate for many reasons, and it can become a stressor in your life. To deal with your debt, you may want to:
- Make a list of what you owe – including the amount and the interest rates.
- Review your budget and spending habits – see if you can find more money to put toward your debt.
- Make more than the minimum debt payment.
- Consider repaying the debt with the highest interest rate first.
- Find ways to reduce your interest rate.
- Consider a consolidation loan – it may be able to reduce the amount of interest you pay overall.
- Think about working with a professional – such as a not-for-profit credit counsellor or financial planner specializing in debt repayment.