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Top 3 Tips To Get Out of Debt

Top 3 Tips To Get Out of Debt

By Anne Arbour

Sex. Politics. Money. 

Which of these topics would you not be comfortable discussing at a dinner party?

My bet is money, but don’t worry – you’re definitely not alone. Money and debt are two of society’s last taboo topics.

Why?

Well, there is often embarrassment and shame about carrying debt, and feelings of failure. But the truth is debt can happen to anyone. A major life event like a job loss, an illness or a marital split can hurt anyone’s finances.

Also, let’s face it, in our consumer driven society, it is just too easy to spend more than we earn, and here you are most definitely not alone!

A recent survey revealed that 47% of Canadians and about 78% of Americans are living paycheque to paycheque and that 35% feel overwhelmed by their debt. Moreover, many are deferring retirement with 46% saying they will now have to work longer than they planned five years ago.

Whatever the reason, know that there are options for repaying your debt. Here are our top three tips to help:

Pay More Than the Minimum 

Be sure that you always pay more than your minimum payments on you credit cards, overdraft or line of credit. If you only make your minimum credit card payments each month, it can literally take another lifetime to pay off your balance. To speed up that process and to save precious dollars in interest along the way, pay as much extra as you can afford. Even an extra $50 each month will help. Try using a financial calculator to see how much you can save like this! 

Pay Your Most Expensive Debt First 

Often called the Avalanche Method, one of the smartest strategies for getting out of debt is to make minimum payments on all of your debts and credit cards except for that one debt that’s charging you the highest interest rate, even if it’s the largest balance. Focus all your extra payment power on that one first. When that first, most expensive debt is paid off, take all of that money that you were paying towards it and now direct it towards the next most expensive debt, while still making those minimum payments on everything else. Continue this method as you’ve paid each of your debts. 

A different variation of this strategy that a lot of people find even more motivating is the Snowball Method. In this case, you follow the same principal of making the minimum payments on all your obligations, but focus your surplus resources onto the debt with the lowest outstanding balance, no matter what the interest rate. When that one is paid in full, you roll all that payment power onto the next lowest balance, and so on. Using this method, you can get to see some quick progress in eliminating your debts, which can give you that extra psychological boost to keep at it. 

Stop Using Credit – While You Work on Paying Off Your Debt 

Studies show that people spend 56% more when they buy food at McDonald’s with credit and 100% more at vending machines and on event tickets. Overall, studies seem to show that we all spend at least 15% more when we buy things on credit.

If you’re an average Canadian household, this means you could save well over $3,000 per year by using cash or debit instead.

What debts could you pay off or reduce with $3,000?

Also, by not using credit and relying on cash for all your transactions, you will start to get back in touch with where you might be overspending. This will be really helpful for you to not fall back into debt in the future. Remember that your overdraft is like a debt too, so stop using your overdraft during your debt repayment period too. If necessary, open a new chequing account and treat your overdraft like a separate loan until it’s paid off. 

If you are currently in debt and have been struggling to make any headway paying down your debt, start by speaking with a Credit Counsellor (there’s a bonus tip #4 for you)! A reputable, not-for-profit Credit Counsellor will review your situation with you in a confidential, non-judgemental manner, usually for free. The Counsellor will then explain the debt options that make the most sense for you.

The only question now is: what pro debt-busting tips will you share at your next dinner party?

For those wishing further information, assistance or to attend a webinar, the Credit Counselling Society, a non-profit registered charity, operates in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Yukon, Nunavut and the Northwest Territories and can be reached at 1-888-527-8999. Consumers living in Quebec and Atlantic Canada can contact Credit Counselling Services of Atlantic Canada at 1-888-753-2227. 

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Anne Arbour is the Credit Counselling Society’s Financial Educator for the Greater Toronto Area. Anne has over 25 years combined experience in facilitation and financial services, including operating her own small business financing company. She holds an MBA and is a Certified Educator In Personal Finance. Anne has served on expert panels for ACTRA and for FuturFund, and has been interviewed by Global News, Today's Parent Magazine, Canadian Money Saver Magazine and The Toronto Sun.