How To Get Out of Debt
In recent years, credit card debt has ballooned in Canada. In our practice, 93% of all our clients owe some form of money on credit cards, and the average outstanding balance is more than $25,000.
It is possible to pay off credit card debt on your own. The question is, can you?
- Paying only the minimum balance, or interest only payments, will not reduce your credit card debt. It will be years before you pay off your balances following this strategy.
- Paying off debt on your own is better for your credit rating. However, this is ONLY if you are able to keep up with your payments. If you are falling behind, making late payments or worse, missing payments, your credit score is already damaged.
If your debts are too large to tackle on your own, consider booking a free debt assessment to determine if consolidating your credit card debt will be enough, or if you need some form of debt relief.
We will review the following credit card debt relief options with you.
Consolidating Credit Card Debt
Consolidating credit card debt can help lower your monthly payments, but you will still have to pay off your original balances in full. How much interest you pay will depend on which strategy you choose:
- A debt consolidation loan can combine balances on several high interest credit cards into one lower interest loan. You will need to qualify for a new loan and there are risks if you cannot meet the payment terms.
- A debt management plan is a way to consolidate several small debts into one payment plan through a non-profit credit counsellor. It is not a debt settlement program because you still pay 100% of the original debt. However, interest relief is often possible.
Borrowing against the equity in your home is an extremely risky way to consolidate credit card debt and other outstanding bills. If you fail to make your payments, your lender can take action to foreclose on your home or take back what you have pledged as security for the loan. Debt consolidation loans can also carry a very high interest rate.
Settling or Eliminating Credit Card Debt
The safest way to eliminate credit card debt for less than the full amount owing is through a procedure under the Bankruptcy & Insolvency Act. These procedures include:
- Reducing your payments and settling your debt by negotiating a consumer proposal.
- Eliminating your debt by claiming personal bankruptcy.
Both of these options will eliminate not only credit card debt, but other unsecured debt including bank loans, payday loans, tax debts and even some student loan debt.
If you need help dealing with credit card debt, contact one of our experts today. We will meet with you, review your situation and help you come up with a plan to eliminate your debts sooner, rather than continue struggling. You may not even need to go bankrupt.
Building a Debt Reduction Strategy
If you want to pay off your credit card debt on your own, it is possible to build and follow a successful debt reduction plan. To help you achieve this goal we’ve created a simple debt repayment worksheet. Use this worksheet and follow some of the best steps for learning how to get out of debt sooner than you might think.
Every step on this list will help you eliminate debt. Whether you plan to get out of debt entirely on your own or whether you need more formal help with debt relief, this is a process that will help you achieve your objective to be debt free. It is important to know that this is not a formal debt management plan, but merely tools to help you become debt free on your own.
1. Determine Your Starting Point
Make a list of everyone you owe money to and input this list into the debt repayment worksheet. Include every credit card, bank loan, car loan, payday loan you have outstanding, even money owing to friends and family. Record the name of your creditor, how much you owe, the interest rate and what your current monthly payment is (even if that’s just the minimum payment right now).
If you don’t know who all your creditors are, get a free copy of your credit report from both TransUnion and Equifax. These reports will list every creditor who has submitted an activity report to the credit bureaus over the last few years and is a great place to start.
2. Find Out How Much You Can Afford to Pay
Next you have to determine how much you can afford to put towards your debt each month. To get out of debt you must be committed to paying as much money as you can against your balances each month. Start by making a budget however figuring out your budget surplus (your income minus your expenses) is just the beginning. You need to find additional ways to redirect as much cash flow as you can towards debt repayment since the more you apply towards your balances, the faster you can be getting out of debt.
There are ways to increase how much you can pay off each month:
- Find ways to earn extra money. If you can’t get any overtime at work, consider taking on a second job or perhaps going into business for yourself part-time.
- Sell some assets. There are two benefits to selling things for cash. First you have money that can be directly applied to paying off your debt. Second, if it’s an item that costs you money to maintain perhaps because of insurance, repairs or maintenance costs, then selling can save you money down the road.
- Lower your living expenses. Your priority should be to get out of debt. So for a while cut back on any discretionary spending. Take your lunch to work. Avoid spending time in stores if you can’t stop spending. Living frugally isn’t a punishment. Make it a family challenge for everyone to find ways to cut back on your spending.
- Stop using credit, now! You can’t get out of debt if you keep adding to your credit card balances. If using credit will tempt you to spend more than you make or than you planned, leave the credit cards at home. Use cash, debit or better still, postpone the purchase for a while.
If you need help budgeting, try our free budgeting workbook. This detailed spreadsheet provides everything you need to create goals, track your spending and create a balanced budget that includes debt repayment. This is a great tool when it comes to determining how to get out of debt fast.
3. Set a Get Out of Debt Timeline.
Now you know how much debt you have and how much you can pay each month. The next step is to set your desired get out of debt timeline. This will be a balancing act between how fast you want to get out of debt and how much you can apply against your debt balances each month. Obviously the more you pay towards your debt, the faster you will get out of debt.
4. Prioritize your payments
When determining how to get out of debt for your specific situation, you will need a well defined plan, which includes knowing how much to pay when. Now you can structure your debts in the order you want to pay them off. There are generally two options you can follow:
- Pay off the highest interest rate debts first. These are your most expensive debts costing you more in interest costs each month. Generally, we recommend paying off high interest debt first since it will save you money and allow you to get out of debt sooner.
- Pay off small balances first. This is often known as the debt snowball method. If you need to stay motivated there is nothing wrong with choosing to tackle a few of your smaller debts first and get them paid of first.
No matter which option you choose, keep up with the minimum payments on all of your other debts while you are putting extra money towards paying off one particular debt.
Using your spreadsheet, sort the debts in the order you want to pay them off. Use the time period on the right to help you decide how much to pay towards each debt every month. Record this amount in the new payment column and then pay this amount every due date. Once a debt is paid off, remove it from the list and re-prioritize your remaining debts.
Consider Your Debt Relief Options
What happens if, even after doing your budget and prioritizing your debts, you find that your debt payoff period will last 5 years, 7 years, perhaps even 10 or more years? Even if you’ve learned how to get out of debt, there may simply be a better option than paying it down on your own. It’s at this point you need to consider debt solutions including a debt management program, consumer proposal or even bankruptcy as an alternative approach to getting out of debt once and for all.
If you are not able to get out of debt through budgeting and making a repayment plan, talk to one of our licensed insolvency trustees about your other options and get debt help today.