Strategies to pay down debt
DebtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition can be a useful financial tool. It can help you buy a car or home. If you use credit cards, there can be added benefits like travel points or extended warranties. But, if you have too much debt, it can limit your financial optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition, make it difficult to save money and lower your overall financial health.
When looking to pay down your debt, consider:
- Tracking your monthly spending. Are you spending on “needs” or “wants”?
- Are your necessary expenditures (including minimum debt payments) less than your net income?
- Ranking your debts by 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, looking for options to reduce your interest rate. For example, do you have high interest credit card debt? Are you able to switch to a lower interest rate card?
- Pay off your debt with the highest interest rate first. This is often credit and department store cards and payday loans.
- Inquire if your credit card company will waive your minimum payments due to COVID-19.
- Try to pay more than the minimum paymentMinimum payment The minimum amount that you must pay, usually monthly, on a loan or line of credit. In some cases, the minimum payment may be “interest only.” In other cases, the minimum payment may include principal and interest.+ read full definition as this will reduce the length of time needed to pay off the debt.
If debt is unmanageable
There are ways to deal with debt if you need professional help. You may wish to hire a financial plannerFinancial planner An individual who looks at your financial situation and builds a complete plan to help you reach your goals. The process may cover: financial planning, risk management, investment planning, tax planning, retirement planning, and estate planning.+ read full definition with experience in debt management issues. They usually charge an hourly rate for their services. You may also wish to consider working with a credit counselling agency to determine if the consumer proposal or bankruptcy process would be of help to you.
The Government of Canada has information about these services on their website including:
- Getting help from a credit counsellor
- Dealing with a debt collector
- Getting help from a licensed insolvency trustee
Please note, a Consumer Alert has been issued from The Financial Consumer Agency of Canada on practices consumers should watch out for if they’re looking at getting help paying off their debts or repairing their credit.
Credit Reports and Scores:
For information about how these options impact your credit score.
If you have payday loans or are considering taking out a payday loanPayday loan A small, short-term, high-rate loan that you can get if you have pay coming from work. A very costly way to borrow money. Also called a cash advance loan.+ read full definition, the Government of Canada has information on payday loans.
If you are considering a payday or cash advance 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, make sure you understand the lending terms including the interest rate and any penalties for missed payments. In Ontario, the maximum interest a payday loan company can charge is $15 per $100 loaned.