At some point in our lives, most of us take on debt. The specific amount of debt will be different for everyone but it’s something most of us can relate to.
Unfortunately, the more debt you take on, the harder it can be to pay it off. We’ve put together nine of the easiest ways to get out of debt in Canada including budgeting and payback strategies. Hopefully these tips will help you get on the right track to getting out of debt.
Identify your debts first
Before you implement a plan to pay off your debts, it’s a good idea to compile a list of everything you owe. It could be anything from a mortgage, student loan, car loan or a line of credit.
When you make your list, make sure you include:
- The total amount you owe for that debt
- The minimum monthly payment available
- Your current interest rate
Once you have your list, you can start thinking about how to pay off your debts. Remember there’s no “one size fits all” for debt repayment. You’ll have to figure out which method works best for you and your lifestyle. Our tips are resources you can use to figure that out!
9 tips to get out of debt in Canada
1. Pay off your debt with the highest interest rate first
A strategy for getting rid of debt is to make minimum payments on all your debts/credit cards except the most “expensive” one (the one with the highest balance and the highest interest rate). Instead, aggressively pay off the debt that charges you the most interest and work on clearing that debt in full, while still making the minimum payment on your other debts. Once you’ve paid off your most expensive debt, choose the next most expensive debt and put the most money towards that. Work through your list and eventually your debts will be paid off.
2. Pay off your debt with the lowest balance first
On the flip side, it may be better for you to pay off your debts with the lowest balance first so you’ll get a quick win. Hopefully you’ll feel good about paying off a debt sooner and it will help you stay motivated to continue paying off your other debts. However, it’s important to remember that you have more interest on larger debts and it may cost you more in the long run to pay off your smaller debts first. It’s all about what works best for you.
3. Pay more than the minimum amount
If you’re trying to pay off a credit card, try to pay more than the minimum amount. The more you can pay off each month, the faster you’ll pay off the debt and the less interest you’ll be charged.
4. Track your spending
Track everything you spend for one month and be honest with yourself! But before you get out the old pen and paper, check your bank or credit union’s mobile banking app (if they have one). Many financial institutions have expense tracking built into their online platforms which makes it very easy to see your spending habits. It’s worth a look!
When the month is up, evaluate where you spend your money and areas where you can cut back. Put that extra money towards paying off your debts.
5. Create a budget
If you haven’t already done so, it’s a good idea to create a budget and plan what you can afford to spend each month. A budget is an excellent way to break down the categories where you spend your money and figure out how much you have to spend and save. It can also reveal areas where you can cut back. If you need a place to start, you can try this budget planner from the Government of Canada.
You can also read our blog post if you’re interested in learning ways to save money on a tight budget.
6. Be frugal
The less money you spend on non-essential items, the more money you can put towards repaying your debts.
You can approach being frugal in a few different ways. Here’s a few of our favourites:
- Use spending jars. Grab mason jars and label them as your major spending categories. This could be groceries, bills, entertainment, emergency savings and debt repayment. Allocate a certain amount of cash to those jars per month and only use what you have. If you don’t end up using all the cash in a jar, add it to the money you’ve allocated for your debt repayment.
- Have a week-long spending freeze. Every once in a while (or however often it’s feasible for you), freeze your spending for a full seven days. Of course make sure you have enough food in the fridge and your bills are taken care of – you don’t freeze those. But other than emergencies, don’t spend anything for an entire week. You’ll learn more about what you can live with and find other places you can cut down on spending.
Read our blog post if you’d like to learn more ways to live frugally in Canada.
7. Consolidate your debt
If you take out a consolidation loan, your bank or credit union will consolidate your debts into one loan with one monthly payment, sometimes at a lower interest rate. This is an excellent option if you can put money away each month that will go towards paying off this debt.
When you consolidate your debt using a loan or line of credit, you can pay off your debts with one monthly payment versus paying off each one individually. A consolidation loan can help you get rid of your debt if:
- It has a lower interest rate than your other debts
- It has a lower monthly payment than all your debts combined
- If you can avoid taking on more debt with your free credit
If you make your payments on time, you’ll keep reducing your debt without hurting your credit score.
8. Start a side hustle
Maybe your day job isn’t cutting it and you need to earn more in order to live comfortably and pay off your debt. Think about picking up some extra work on the side. Maybe you can freelance in your current field or perhaps you’d rather do something that’s extremely flexible, like delivery driving. There’s plenty of options out there if you want a few extra hours per week to get you closer to paying off your debt.
9. File a consumer proposal
If you’re really struggling, you can file a consumer proposal to your creditors with the help of a Licensed Insolvency Trustee. This proposal is an alternative to bankruptcy and ideal for those who cannot manage their debts but have a stable income.
The consumer proposal can help you make a deal with your creditors. They may allow you to make set payments for your debt and in some cases, you won’t have to pay interest. Many creditors accept consumer proposals as they’d rather be repaid some than nothing. They’re usually willing to accept less than the full amount you owe on your debt and are willing to negotiate a payment plan that works for you.
There’s a lot you can do to get out of debt in Canada, however some debt is good (and actually helps you build credit).
If you need a new vehicle and are looking for an affordable payment plan, our credit experts are ready to help you, even if you have bad credit. You can fill out an online Car Loan Application and our credit experts will help you find a payment plan that meets your budget and lifestyle. You can also reach out for a complimentary credit check.
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