12 Ways to Kick Debt

A lot of people in debt can sometimes feel lost…they’re not sure if it’s best to start paying it down or completely getting rid of it altogether. Like a lot of things in life, there isn’t one silver bullet that works perfectly for everyone. In the interest of considering all circumstances, we’ve put together 12 ways to get you started on your journey of not only paying down your debt, but also getting out of it.

  1. You can pay more than the minimum payment

One of the best ways to pay down your debt is to pay more than the required monthly minimum. We get it, it’s tempting to only pay the minimum amount required, and use the extra money for something else, but, if you only pay the minimum, you’ll be caught in a vicious cycle – your debt will never decrease. You see, whenever you have a debt facility drawn, and a new month rolls over, you’ll be charged interest on the balance. Now, making the minimum monthly payment will certainly keep you compliant with your bank, but it won’t move you closer towards reducing the balance to zero…the only way to do that is to pay above the required minimum each month, which ensures you’re paying off both the principal and interest amount.

Also, when it comes to debts, always pay them on time, as a failure to do so will result in unnecessary late fees.

  1. Spend less money

This tip is simple: if you want something, don’t buy it unless you can absolutely afford it. Though, in reality, this principle is harder to apply – especially in this day and age, where shopping has become incredibly easy (thanks Amazon!). Most people go into debt because they buy what they want, when they want it, rather than what they need or can afford.

 

Even temporarily, this strategy will help you save money which can be used to pay down your debt. Earlier, we spoke about vicious cycles, well this cycle is called a virtuous cycle – as you save money and subsequently channel this towards your debts to pay them off, you create a positive feedback loop. In time, your priorities will eventually shift, and you’ll start using this extra money to invest, rather than simply pay down debt.

One way to spend less is to pay with cash, rather than credit. Studies have shown that people spend at least 15% more on everything they purchase when they use credit. Applying this theory to Canadian households, an annual saving of $3,000 could be achieved if purchases were only made with cash. This cash strategy is quite hard to pull off, as the world is very much moving towards a cashless economy, however, while cash is still legal tender, give it a shot!

 

  1. Divide and Conquer Method and David V Goliath

 

In a previous article, we spoke about two effective strategies one can use to pay off credit card debt – here, we re-visit those strategies (The David V Goliath and the Divide and Conquer methods).

 

  • David V Goliath: This method will see you choose the one debt that is charging the highest interest rate and focus all of your efforts on paying off that debt first. With respect to all of your other debts, only make the minimum payments, to ensure you comply with your lenders’ payment schedules. The reasoning behind this is that once your most expensive debt is paid off, you can refocus that money on the next most expensive debt, until you are left with your least expensive debt. This method should help you reduce your debt faster.

 

  • Divide and Conquer: This is largely a psychological method which suggests you should pay off your smallest debts first until you get to the largest. The idea being, that the more you pay off, the more motivating it is. For many people, this works well, as this method sees you provide yourself with a set structure, where each card is being paid out, one at a time, from smallest to largest.

 

  1. Don’t buy a new car

 

For many people, the largest purchase they’ll have in their lives is a house, with a car coming in at second. There are many good reasons to buy a car – you need it to get to work, you live in an area that doesn’t have great public transport, or you like to escape to the countryside on weekends…the problem is, many of us are tempted into buying a brand-new car and put simply, this isn’t the best financial decision. Did you know that when you purchase a brand-new car, its value will halve within the first four years!

 

I’m not saying don’t purchase a car, because the reasons listed above are definitely valid…what I’m saying is, don’t purchase a NEW car. Next time you’re in the market for a car, look at used cars instead. Not only will you save money, but you can also use this extra money to pay out your other debts, thus improving your overall financial position.

 

  1. Sell your car, or consider your need for more than one car

 

Continuing on with our car theme, this option is often 80% cheaper than owing and operating a car, and you can save thousands of dollars every year by using only one car. The average vehicle owner spends over $9,000 per year in ownership and operation costs. This figure can jump up drastically if you have an accident that isn’t covered by your insurance.

 

Alternatively, you can lower the insurance to ‘pleasure use’ only, take public transit, walk, cycle or even car pool. Even the odd taxi trip is unlikely to amount to nearly as much as continuing to pay for a second car.

 

The general rule you can apply is the more assets you have, the more upkeep costs you have, so unless those assets generate cash, or grow in value over time, re-assess your needs and remove them if possible.

 

 

 

 

 

 

 

 

 

 

 

 

  1. Plan your groceries

 

So many people lose money at the grocery store. I’m not talking about it falling out of their pockets, but rather, they buy items they don’t need. When it comes to groceries, make a list of what you want and only buy what is on that list. Get in, get out and fight the urge to wander around the supermarket, treating yourself to things you don’t need. These temptations are hard to fight off, but trust me, it’s worth it in the long run.

 

Also, watching for sales can be a valuable tactic. The key to this strategy is stocking up on non-perishable groceries when they are on sale and due to the extra stock you have, you can likely skip one grocery shop every month. Filling your pantries when groceries are cheaper and then skipping that extra grocery store visit can save up to 25% on your annual grocery bill.

 

  1. Earn more money: Pick up a side hustle, or a second job

 

Another common way to pay down your debt is to earn more money, which can amplify your efforts to reducing your debts even more. You may be able to do this by getting a second job or picking up one or two extra shifts. For this to work, all of the extra income you earn must be applied to paying down your debt.

 

Another way you can earn extra money is by picking up a side hustle, perhaps by capitalizing on a hobby you enjoy or a skill set you have through sites like TaskRabbit.com or Upwork.com. If you’re creative, sell your creations on Etsy. If you have storage space in your garage or a spare room in your house, you could also use your home to generate extra money through Airbnb. Side hustles are all the rage in 2020, so cash in now. If you’re needing some inspiration or ideas, check out this article from Entrepreneur.com.

 

  1. Track your spending and identify areas to cut back

 

If you’re committed to reducing your debts, you need to identify and cut your spending and the best way to do this is to develop a budget. This budget will provide you with a blueprint of your finances and you can use it to evaluate your habits and look at the small ways you’re spending your money on a daily basis. That way, you can audit your purchases and take account of whether they are necessary and, if so, minimise them or get rid of them. For example, audit what you’re spending monthly and determine what are ‘must haves’. Do you really need Disney+ and Netflix? Can you exercise without a gym membership? These are ‘nice to haves’ if you’re not in debt, so be strict with yourself.

 

Another way to address this strategy is to understand your temptation and avoid it. It could be an online store, your favourite meal or happy hour. Whatever it is, it’s best to avoid it altogether when you’re trying to pay down your debt. When you’re tempted to spend more, it can be even more difficult to avoid new debts, let alone old ones. For example, if your habit is a daily latte or lunches during work hours, the best plan of attack is to either replace it with something less expensive, or eliminate the behaviour.

 

Of course, pausing your credit cards or hiding them away for the time being can avoid this temptation as well. Credit cards make it incredibly easy to spend, so take them out of your sight.

 

 

  1. Get a consolidation loan

 

A consolidation loan is a popular strategy which involves you taking out one loan and using the proceeds to pay out all of your other debt. Typically, the goal is to find a loan that is charging less interest than your other debt, so as you consolidate all of your debts, you’re saving money. You’ll also reap the rewards of having a simple and streamlined debt structure – having it all in one place is convenient and involves much less administration.

 

Jumping on this path can be a helpful first step to getting your debt paid off, however studies show that for this to really help, you need to solve your underlying problem of spending more than you earn. The key to achieving this requires that you create a budget. We covered this in step 8, however it’s important, so we should cover off on some of the other benefits you’ll receive when you use such a tool. A budget helps to ensure that:

 

  1. You’re not building up new debt while paying off the consolidation loan.
  2. You save something every month, and you set aside for emergencies or unplanned expenses, which inevitably occur.

 

If you want to learn more about this strategy, we’ve delved into what consolidation loans are here and here [note: add links].

 

  1. Refinance your mortgage

 

This strategy comes under the debt consolidation method we spoke about above. It’s

an attractive method for many, as the interest rate on home loan debt is far lower than that of your typical personal loan or credit card. Essentially, this strategy will see you increase your home mortgage (you drawdown the equity available in your house) and use this cash to pay out your personal loans and credit cards. It’s important to note the following:

  • You must have enough equity in your home to do this.
  • You are increasing your home mortgage debt by the amount of the other debt you’re paying off. Therefore, you’ll owe the same amount of debt, but the refinanced debt would have moved from a higher interest rate facility onto a lower interest rate facility.

 

Example below:

  • You own a house that is currently valued at $750,000 and your current debt on this house is $300,000.
  • Typically, banks will only lend you 80% of the market value of your house, so in this case, $600,000 (750,000 x 0.8).
  • Given that your current debt is only $300,000, you can draw up to another $300,000 and use this to pay out your other debts, which would likely have higher interest rates than your home mortgage.
  • The formula I’ve used here is:
    • $600,000 total debt a bank would give you minus $300,000 of existing debt.

 

It is important to note that having a conversation with an accredited credit counsellor first is important, so that you can consider all options and advice from someone other than your lender. If you repeatedly use your home to refinance your debt, you can face retirement with a large amount of debt, no assets and no savings.

 

 

  1. Speak to your credit counsellor

 

If you feel overwhelmed by the debt owing, find a credit-counselling agency and speak to a professional, accredited counsellor. They will assess your financial situation, help you sort through your unsustainable spending habits, set up a practical budget and advise you on the most appropriate debt-relief options for your situation.

 

The counsellor will also help you find out what programs are available to deal with your debts. Speaking with a credit counsellor is confidential, non-judgemental and free. It’s a resource which is there to be used, so don’t wait and feel like this burden is yours to carry alone.

 

  1. Create a practical budget (i.e. a spending plan)

 

This is the third time we bring this up…Create a budget that is practical – it doesn’t have to be complicated. You simply need to track what you actually spend over a month, not what you think you spend. Many people are surprised with their spending habits once they see them written down and the mere act of writing it out will likely help you identify ways to cut back your spending.

 

You can start this process by collecting a list of your debts and income and once you have this data in hand, you can list all of your debts and include the creditor’s name, balance owing, monthly minimum payment and interest rate. You can then allocate the money you find to pay down your debts. Once again, the trick here is seeing everything written down. This helps you manage it more effectively.

 

A budget shows what you’re spending and where it makes sense to put your money, whether it’s from interest saved or dollars earned. It will help you stay accountable to your debt payments and your new accelerated payments. There are multiple resources and tools to learn how to create a budget.

 

For some people, this can save them almost as much as working a second job – scary but true!

 

Contact Us

 

The key to removing your debt altogether, is ensuring that when disaster strikes, you will be able to weather the storm. It’s important to know that despite the type of debt you’re in, there are multiple ways to manage it and there are multiple (more than 12!) ways out. While it is unlikely to happen in a day, or a week, you can create a debt-free future if you create a plan, and stick with it long enough.

 

If you’re seeking further information on the above, please contact us for assistance.

 

5 Steps to rebuild credit in Canada

No matter how bad your situation was (or currently is), you must remember that there’s always a bright future ahead.

Many people who experience unfortunate circumstances with their debt can often feel trapped, because as they default on their debt obligations, their credit score is impacted and they are subsequently unable to borrow.

However, through patience, perseverance and adopting the steps outlined in this piece, you can rebuild your credit in Canada.

That’s right…you read correctly, you can pick yourself back up, successfully build your credit rating and place yourself in a position where you’ll be able to borrow again.

If you’re interested in rebuilding your credit, please read on, as we’ve outlined five steps which are practical and effective.

Step 1: Your Credit report

Before you do anything, you must check your credit report. Checking your report will allow you to immediately pinpoint the areas that need improvement…think of it as a map, which will guide you to your end point in the most efficient and safest way possible.

Your credit report contains all sorts of information about your credit facilities, such as:

  • When you opened your accounts;
  • Level of debt and utilization rates;
  • Whether you’ve missed payments and;
  • How often you breach your limits.

A lot of people don’t know that by law, you have the right to check this information and correct it if it’s wrong. In Canada, there are two major consumer credit bureaus – Equifax and TransUnion. They compile the information mentioned above and provide it to banks and other lenders, who use this information to assess your creditworthiness.

It’s important to note that each credit bureau may have different information about your credit history, so it’s wise to obtain copies from both agencies.

Step 2: Negotiate with your creditors

Your credit score is most impacted by your payment history, so if you really want to make an impact on your score, you must figure out a way to get your accounts up to date. This isn’t as hard as you think and. To make it easier for you, we’ve detailed some proven methods which you can adopt.

A great starting point is reaching out to your creditors and being truthful about your situation. This might seem like counterintuitive advice, because we all know that it can be hard to face people when you’re going through a rough patch, especially if you owe them money, but being honest with them will likely lead to a better outcome. Specifically, you should seek to put in place a win/win payment plan.

Win / Win Scenarios

A win/win scenario sees both parties get what they want, i.e. you don’t drown in debt repayments and they get some of their money back. You might be thinking that no lender will ever agree to receiving less than what is owed to them, but think of it like this, if you are so under stress that you can’t pay a single cent, then they’ll get nothing – the fact that you’re willing to speak with them and put in place a plan which sees them get something is a far better option for them.

If the relationship between you and your creditors has broken down and an arrangement can’t be reached, one of our credit counsellors may be able to help you with a plan. Ultimately, the goal is to get your accounts up to date as soon as possible, as this is a major driver of positive credit scores.

Getting your accounts up to date will not only mend the relationship between you and your creditors, and address the number one factor impacting your credit score, but it will also drop debt utilization limits, which is the second most important factor impacting your credit score. What do I mean by credit utilization? Let me provide you with a simple example:

  • Let’s assume you have an available credit limit of $30,000 and you’re currently using $15,000.
  • Your utilization limit on this debt is 50% (15,000/30,000).

This is important to know because if your utilization limits are too high, it means you don’t have as much available credit and as a result, your credit score will be impacted. Your goal should be to drop your utilization limit to under 50%, noting that if you get it under 35%, you’re doing extremely well. Anything above 75% will adversely affect your credit score, so whatever you do, try your best to get below this limit.

Step 3: Rebuild Your Credit

The first two steps deal with understanding the scary landscape that is your debt, as well as beginning to walk down the path of setting up and executing an intelligent payment plan on your account…Step 3 is all about rebuilding yourself.

Specifically, this step is all about building a consistent payment history and in doing so, demonstrating that you can pay back money you’ve borrowed. This proves to creditors that you are responsible and know how to manage debt.

The best way to do this is through using a secured credit card (don’t just take our word for it – Forbes released a great article on this, which can be found here).

A secured credit card is exactly the same as a normal credit card, except for one key difference, you will need to provide a security deposit, which will be collateral for the card. The card will grant you access to credit and as you spend with the card, your activity will be reported to the credit bureau’s each month. This is critical, as this information is what will build your credit score.

Secured credit cards typically have lower limits than traditional cards, ranging anywhere between $100-$1,000, but they can be highly effective in building your history and lifting your score.

A common question that is asked is “how long do I need to use a secured card for, before I can upgrade to a normal, unsecured credit card?”. Generally speaking, it takes approximately 6-12 months of spending activity before you can ‘upgrade’. During this time, you must be diligent with your spending and meet monthly repayments, as and when they fall due.

Remember, you must always act responsibly with credit, even if it’s secured. Credit cards shouldn’t be used irresponsibly.

Step 4: Minimum payments and due dates

Nothing will undo all of the hard work you undertake to improve your credit score like a late payment. Put simply, you cannot afford to do this. It is absolutely critical you continue to meet the minimum monthly repayments ON-TIME for both your credit and non-credit bills.

Things like missing utility bills, or paying old phone bills late, or even missing a parking ticket, all register with the credit bureaus and paying them late severely impacts your credit score. You must be a reliable payer across all of your credit and non-credit bills if you want to maintain and improve your score.

The best way to ensure you don’t miss payments, is to set up automatic bill payments, so that each month, your accounts will be debited and your bills will be paid. This is a seamless approach and is also very low on administration fees, as you won’t need to pay for things like envelopes, stamp and cheques. You’ll also save a lot of time not having to visit the bank. Automatic payments can be set for whatever amount you choose, but it’s wise to at least pay the minimum monthly repayment.

Setting Up Automatic Payments

If you do decide to use automatic payments as a way to manage your monthly bills, you must ensure that your bank account has enough money to cover the monthly debit. If you don’t have the required balance to meet the repayment, the automated payment will fail and you will miss the repayment for that month. It will be a major setback in your quest to rebuild your credit. If the payment does make it through, even without the required balance of funds being in your account, your bank will likely charge you a Non-Sufficient Funds Fee, which can range between $27-$35.

If setting up automatic payments isn’t your thing, you can simply set reminders for yourself in your calendar. Do this across your phone and desktop, so you don’t miss the monthly repayments – they are important, so give yourself the best chance of meeting them.

Once again, the goal is to rebuild your credit, so it’s imperative that you don’t ‘skip a beat’ when it comes to payment and always meet the minimum monthly repayments.

Step 5: Financial Habits

Developing and maintaining strong financial habits will be the foundation of your long-term success. Habits such as saving money each month and never missing your monthly repayments will form a strong foundation from which you can rebuild your credit score.

The most important financial habit you can adopt, if you haven’t already, is building and constantly referring to a personal budget. It’s amazing how few people do this, yet it’s so powerful. Having a budget will help you live within your means and effectively plan for the future. It can be used as an extremely effective tool that will help you prioritize your spending.

Using monthly calendar reminders, automatic payments and budgets can be a powerful combination that will set you well and truly on the right path to rebuilding your credit and improving your ability to access finance in the future.

Another proven financial habit you can adopt is living frugally. Many people think that this is simply about saving money, but it’s more than that. Living frugally is all about thinking deeply about what you truly need in your life. It’s fair to say that many of us have too many possessions…if we sat and thought about what we truly need, we’d see that there’s a lot of clutter we could sell or dispose of.

To learn more about frugal living habits, click here.

Patience is a virtue

When you’re on the path to rebuilding your credit, it’s important to remember that you must be patient. All of the methods, steps and habits outlined above take time to work, especially if you’re coming from a low credit score.

Having a bad credit score is very limiting and it will impact your life in more ways than one, so it’s important to take it seriously.

Have a look at some of the ways a bad credit score will impact you in everyday life:

  • Accessing loans: Your ability to access loans will be severely weakened and even if you do qualify for credit, the interest rate you’ll pay will be too high.
  • Insurance: You’ll pay far higher insurance premiums when you have a low credit score. Insurance companies take into account a variety of factors when determining your premiums, and personal credit scores carry significant weight in their decisioning process.
  • Securing employment: Employers don’t see your full credit score, but they do see a modified report, which shows debt and payment history. If the report shows signs of distress, it may indicate to them there’ll be problems on the horizon. Think about it, late payments could be interpreted as being unorganized, and having extremely high utilization limits could be viewed as being irresponsible, and thus, being a poor fit for the job.
  • Renting: Just like applying for a loan, when you apply for a rental property, the landlord will likely want to see your credit history, as this will be a good indicator of how you’ll handle your payment.

As you can see, these items listed a above are core pillars of your life, so it’s important to have a strong credit score and maintain it.

You may feel a bit daunted or overwhelmed, but if you stick to the five strategies listed above, you’ll build momentum and successfully rebuild your credit score. Bankruptcy isn’t the end of your financial future, it’s simply the beginning of another chapter, which you can build from.

Credit Card Debt Solutions

If you find yourself in a situation where debt is overwhelming, there are a number of options available.  Like most things, there are upsides and detractions for each choice and not every option is available to each person.  There are also different types of companies and services to help you with your dilemma.  A great deal depends on your particular circumstances and preferences.

Debt Consolidation Loan

This is where a lending institution, like a bank, credit union, etc., sets up a loan.  With that money you pay off all the other creditors.  It leaves you with a single, or “consolidated” loan.  Whether the loan is approved and its interest rate depends upon such factors as current credit score, whether you have a business relationship with them, type of collateral, and net worth.  You may also be asked for someone to co-sign with you.

  • Benefits – You only have one payment per month rather than multiple, frequently the interest rate is lower than most of the other creditors, and the loan is paid off over a fixed period of time.  There are fees associated with this choice.
  • Disadvantages – You will probably need something for collateral.  That is something of equal or greater value to the loan that can be repossessed or sold if you fail to make payments.  They will review your credit score and if it is not high enough, you can be rejected.  Interest rates can be high, higher than a home equity loan.

Home Equity Loan

There are a number of terms for this including a refi or mortgage refinancing, or a second mortgage.  The amount available to lend depends on how far down you have already paid your mortgage.  So, if you have a mortgage for $250,000 and you have paid $50,000 of it, you have $50,000 in equity that will be available for a home equity loan.  You will need to speak with your banker or credit union about the details, including the interest rate.

  • Benefits – Usually these loans are a lower interest rate and the payment terms are more flexible.  It can be that you can just extend the term of your current mortgage.  That is for the lender to decide.
  • Disadvantages – You have to own your home and have enough equity to cover the amount you want to borrow.  There will be fees involved and possibly a home inspection.  Not all lenders like to issue this type of loan or they may have a maximum they will lend.

Line of Credit

A line of credit turns your bank-issued debit card into a credit card.  That means you can overspend using only that card up to a specified amount.  Just like a regular credit card, you have to repay that amount in monthly instalments.  Depending on the bank and its current standards, you may have to provide some collateral and the amount may vary.

  • Benefits – This may be one of the lowest interest rates, depending on the bank’s policy and economic conditions.  You have flexibility with repayment.
  • Disadvantages – The interest rate can fluctuate with the Bank of Canada prime rate, so it can increase without much notice.  You will need to maintain self-control about repayment and not increasing this debt.

Consolidate into Another Credit Card

Sometimes credit card companies offer some low interest rates to promote a new card.  Sometimes they will allow balance transfers from other cards into this new card.  If you can qualify, this is a good opportunity to consolidate debt.  However, remember that these promotional rates are usually only good for a limited time.  Then the rates can skyrocket.

  • Benefits – With all the debt in a single source, it is easier to keep track.  With lower rates you can pay more than the minimum each month and get into good standing quicker.
  • Disadvantages – If you have so much credit card debt that you need to consolidate, it is not likely that your credit score will qualify you for a new card.  As mentioned, the low interest rates are only available for a period of time, with the new rates significantly higher.  Without a personal budget firmly in place, it may take a very long time to get rid of the debt.

Debt Management Program

This is a program offered through a non-profit credit counselling company.  The company negotiates with your creditors.  The company pays off all the credit cards and loans and then you repay the counselling company.  There are both non-profit and for-profit counselling organizations.  The for-profits can charge a large fee.

  • Benefits – Most debt is repaid within three years but must be completed within five.  There is either a low interest rate or sometimes none at all.  The counsellor will provide free budgeting instruction, financial education, and one-on-one help.
  • Disadvantages – The creditors must agree to the arrangement and not everyone qualifies.  Your credit score is flagged for two years after the last payment is made.

Debt Settlement

You can offer to pay off your creditors in one lump sum but in less than the full amount.  Creditors are unlikely to agree to this one-on-one, but many credit counsellors have been successful.

  • Benefits – The debt is eliminated immediately and you repay far less than the full amount.  Your credit rating can be repaired in two years after the settlement, if you work through a non-profit counselling organization.
  • Disadvantages – You have to have the lump sum available.  For-profit companies have a lower success rate and still charge a hefty fee.  Using a for-profit means your credit is impacted for up to seven years.

Consumer Proposal

A Bankruptcy Trustee can negotiate a settlement with your creditors.  If the creditors agree, this will pay off the debts at a lower amount.

  • Benefits – You repay less of the principal than you owe and interest stops.  It avoids bankruptcy.
  • Disadvantages – It is a legal process that will appear on your credit record.  Once you start, you are committed to the program.  At least half of your creditors must agree to the program or it will not go into effect.  There is no ongoing educational support.

If you find yourself in significant debt, the best solution is to get counselling from a financial advisor.

Top Tips for Paying Off Credit Card Debt

It seems so easy to become trapped in credit card debt with everything going on in the world these days.  It also may seem even more difficult to rid yourself of that debt.

If you are finding yourself in this position, here are some ideas about how you can handle paying off your credit card debt altogether.  These are practical tips that most everyone can implement. Let’s get started.

Write Down Your Goals

Take some time to sit down and actually write down goals.  It is shown that written goals and reviewing them regularly will prove to be a motivating factor toward achieving them.

It may be a bit depressing, but list everything you owe.  That will include credit cards, mortgages, car loans, lines of credit, and overdraft fees.  There are some online programs that will help if you need them.

Stop Using Your Credit Cards

Don’t use credit cards.  Physically remove them from your wallet or purse.  This will help stop impulse buying or recognizing necessities from “wants”.  Pay for purchases in cash only.  This can help you realize areas where you can economize and help you focus on the goals of reducing your debt.

Prioritize Your Wants and Needs

List everything you owe.  Perhaps you have already done that when you set your goals.  If not, record everything including their balances, interest rates, and fees.  Note any benefits like cash back amounts.

Next, arrange them in order of importance.  Rent/mortgage payments and car loans will probably be at the top of the list.  That is because they are necessary for you to have shelter and transportation.  The rest of the list you may want to rearrange.  Some people want to tackle the smallest balances and just get rid of them.  Other folks are interested in getting rid of the cards with the highest interest rates.

Whatever your priorities are (and these may change), put them in order and keep that with your list of goals.  As you eliminate one of those cards, cross it off your list as an incentive to keep at it.

Look at Your Expenses Carefully

For at least two weeks, write down every penny you spend.  Include that fancy coffee; the post-work beer after a long, hard week; the candy bar from the vending machine; groceries; fuel; utilities; pretty much everything.  This will help you understand where the money is being spent.

Then you can look at ways you can economize.  No a home brewed instant coffee in the microwave is not nearly as tasty as that double shot latte, but look at the cost savings.  Another surprising expense is eating at fast food places instead of cooking.

Are you not an expert in the kitchen?  Strike some type of a deal with a neighbour to swap chores for cooking, to learn, or  to share meals.  Eat leftovers.  Be creative.  Buy generic or store brands; compare prices not just the total but the unit pricing to see what is the best deal.  Some grocery stores reduce the price of meats on the sell-by date.

Another thought is to only shop once per week.  That will save on impulse buying and insure that you only spend what you have allocated.

There are even more ways to save.  Research some other ways to save money.  There are a number of sites that can be very insightful and have resources and plans to follow.

Plan Your Spending Wisely

There are sites that provide an interactive and easy spreadsheet to calculate what you have to spend.  There are also low tech options like a paper and pencil and it is called a budget.  Include holiday expenses as well as those birthday gifts.  For close family and friends, you can explain that you are tight on money, but give them your time and energy instead.  Redeemable coupons can be fun to exchange instead of just another dust catcher.  Reduce the number of cable channels to a lower or even a basic package.

Check Interest Rates

A popular method is to implement this strategy.  After paying the fixed amounts like rent, vehicle loans, and insurance, make at least minimum payments on the credit cards.  After this look at any extra money and apply it to the balance of a credit card account that has the lowest interest rates.  Once a card is paid off, start paying down the balance on the card with the next highest rate.

Call the credit card people and see if they will reduce the interest rate for a year, or even six months.  This little bit of extra savings can mean you pay down the bill sooner and can move into a more secure financial situation.

Check Balances

Another tactic is to pay off the credit cards with the lowest balances first.  This makes people feel in control because progress is visible.

  • Don’t be concerned with the interest rate; just look at the smallest balance.  Put any extra money toward paying it off.
  • After that one is taken care of, use the money you would have allocated to XYZ credit card toward the next lowest balance.
  • Repeat.

Analyze and Act

For some people one or the other of these methods works better.  If the first one does not leave you feeling motivated, switch techniques.  You need to maintain momentum to be successful.

End the Card

Once the credit card is paid in full, cut it up or shred it and cancel the account.  Be sure to tell the customer service representative to take your name off all future offers.  Most people survive on only one or two credit cards.

Use Reserves

Consider tapping into your savings account.  Try to put some money aside for emergency expenses, but if you are saving just for the sake of saving, use some of it for paying down bills.  Most savings accounts interest rates are significantly lower than the interest you are paying on the credit card.  You can also think about holding off those extra payments into Canada Savings Bonds until you are on better footing.

Balance Transfer

If you can qualify for a credit card with a significantly lower interest rate, see if they can arrange to transfer a balance from another card.  This can save money on interest charges over time.  Just be sure to understand how long that lower, “introductory” rate is valid and any penalties or fees involved in the transfer.

Debt Consolidation Loan

Working through a licensed counsellor, you can secure a debt consolidation loan that will pay off the credit cards in one swoop.  Then you only have a single monthly payment instead of multiple checks to write.

If you opt for this, be sure to select a reputable firm and understand all the terms and conditions.

Also, at that point destroy your existing credit cards.  This will prevent you from using them and getting yourself back into the same pickle you just got out of.

Refinance the Mortgage

If you own your home, you can check to see if you have enough equity to consolidate your debts into a new, or second, mortgage.  Before you take action, try talking with an independent counsellor about this option.

You will need to review all of the interest charges as well as the fees for the refinancing, possible inspections, additional mortgage insurance rates.  Outside of banks and credit unions, there are companies called home equity lenders.  These are not always the best choice and can create more problems.