4 questions to ask yourself
- What debts should you pay off first? Usually, you’ll want to pay off the debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition with the highest interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition sooner. For example, credit card debt is more costly than a mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition.
- Could you pay more each month? Find where you can cut your spending until you clear your debt.
- Could you combine your debts with a consolidation loanConsolidation loan A loan you take to pay off many other debts. Often a way to get a lower interest rate or a set interest rate that won’t change.+ read full definition? This reduces the overall rate of interest on your debts.
- How can you avoid taking on any more debt? For example, use cash, not credit cards, for everyday purchases like groceries and gas. Store credit cards often charge 20% or more in interest. If you owe $1,000, you could pay as much as $200 in interest in the first year. Credit cards from a financial institution also charge high interest rates.
5 steps to pay down debt
1. Budget a set amount each month
Look for ways to cut your spending so you can free up money to pay off debt. Even a small amount each month will start to reduce the amount of interest you pay.
2. Pay off high-interest debt first
Your biggest loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition may not cost the most. Your mortgage may be the biggest debt you have, but it’s probably the cheapest. 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.
Store credit cards often charge 20% or more in interest. If you owe $1,000, you could pay as much as $200 in interest in the first year. Credit cards from a financial institution also charge high interest rates.
3. Consolidate your debts
If you have a number of different debts, consider a consolidation loan. This means you take out a loan or increase your mortgage to get enough money to pay off all of your other loans. The advantage is you lower the overall interest rate so it costs you less to pay off. This only works if you don’t rack up more debt.
4. Set up automatic withdrawals
When you have extra money in your chequing accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition, you might be tempted to spend it rather than use it to pay down debt. If the money is withdrawn from your account automatically, you won’t have a chance to spend it. See if your bank can make an automatic withdrawal from your account every month. 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. If you use online banking, you can likely set up these automatic withdrawalsAutomatic withdrawals An arrangement you make with your financial institution to move money regularly from any number of different account types.+ read full definition on your own.
5. Make extra mortgage payments
Many mortgage lenders will allow you to make extra payments against the principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition. Paying down your mortgage by even a small amount can dramatically reduce the overall cost of this loan over the years.
5 quick steps to get started
- BudgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition a set amount each month
- Pay off high-interest debt first
- Consolidate your debts
- Set up automatic withdrawals
- Make extra mortgage payments