Did you know the debt of the average Canadian household is $72,950? It is easier than ever to let debt spiral out of control without realizing it. But when it does, do you know how to pay it off and get back on your financial feet?
It is a long process and you must make sacrifices, but it can be done. Read on as we discuss our essential guide to getting out of debt.
Start by Acknowledging the Debt
The first step is owning up to the debt you have accrued. This means being honest about your personal finances. It is no use throwing bills away, pretending they don’t exist.
Start by getting out all your bills and laying them out in front of you. Create a household budget, including all expenses, such as living costs, rent or mortgage, and your luxuries expenditure.
Your base payments are spending on food, utility bills, rent or mortgage, and then credit card or loan repayments. When combined, if they exceed your monthly household income, then you need to make drastic changes. If they do not exceed this, then see how much you have leftover, cut down on luxury spending, and use it to pay off the most pressing debts.
An important step when paying off debt is to stop borrowing. It can be tempting to offset one bill or loan with another. However, this is not managing debt, it is simply transferring and delaying the problem.
The easiest method is to cut up your credit cards. This way, you have no fast access to instant loans. However, you must also dig a little deeper.
Your attitude should change towards having no new debt at all. That means no new loans or transfers, even if they seem to work out cheaper than current payments. It also means no debt consolidation at this point.
Start to live on a cash basis. Take what you need out of the bank each week, and use cash, even in preference to debit cards. You will soon start to change your views on money and spending.
Earning more money is a simple solution. Sometimes, cutting your spending just isn’t enough. You may still need to live and provide for a family and in these instances only more money will do.
Extra income gives you more capital to pay off the debts that have been mounting up. Luckily, there are multiple ways you can do this.
The first is to take on more responsibility at work. Perhaps you could attempt to get roles higher in the company or take minor paid responsibilities.
For many, this will not be an option and the only way to combat this is to get a second job. This can be a part-time position in a company or something that you set up on your own. If you are part of a couple, you could both do this to double the amount of extra income you are bringing in.
All doing this will cost you is time. You may have to make sacrifices, seeing your partner or children less for the next year or so.
The next step is to begin selling off items you don’t need. It is quite probable that if you have got into consumer-based debt, then you have some items that are quite valuable. Start with a huge clear-out, and see what items you no longer need.
Once done, you can list them for sale online. Facebook Marketplace and eBay are the most common places. As always, make sure the cash you earn from the sales goes into paying off debt and is not spent on extra luxuries or grocery shopping.
After this, you need to start making some sacrifices. Look at your current outgoings to see what spending can be minimized.
For example, you may be renting a bigger house than you actually need. Perhaps you could move to a less expensive area for a few years until the debt is gone. You may be able to sell your vehicle and downsize to a smaller and more fuel-efficient model.
Don’t sell anything that may hinder your progress to debt freedom. For example, selling a car may give you some cash now, but it may prevent you from doing a second job later down the line. If you believe something is essential and really can’t do without it, then it stays.
Know What Debts Are Most Important
Not all debts are created the same, and you need to know which are the most pressing. Your priority should be the ones with the highest interest, followed by the lowest interest, then tax-deductible debt last.
In addition, you should prioritize any bills that are charging you fees for late payment. Make sure you have at least paid the minimum amount each month on time to avoid penalties. Create a calendar showing when every bill is due and when you have to pay it to be on time.
Use a Debt Snowball Method
Now you know the most important debts and have a plan for budgeting, it is time to bring in a strategy. One of the most successful and popular methods is the snowball. It aims to maximize your payoff schedule, dealing with your debts one by one.
For all of the debt you have, make sure you only pay the lowest monthly fee. This stops you from incurring extra charges. However, the most pressing debt will be the one you put all of your extra funds and income into.
These debts get paid quicker, and once it does, you have even more money to spare. These extra funds from the cleared debt go into your second debt on the list. This carries on until all of the debts are cleared.
The trick is to make sure all of the funds you accumulate go into paying off debts. For example, if you pay off one debt and it gives you an extra $100 a month, don’t spend that money on extra groceries or days out. Be strict and make sure it is spent on removing debt.
Now you are working towards paying off debts with a strategy, it is time for negotiations. With this, you have to be honest and lay your cards on the table. Don’t be afraid to tell people you are struggling, but have a plan that is working to pay off your creditors.
Contact the credit card company or the bank your loans come from. Arrange a meeting, telling them the situation and showing them what you have done to alleviate the situation. They may be able to provide you with better rates or payment methods, particularly if your credit is still good.
It is actually in their interest to clear you of debt when you reach this point. This way, they get their money back. If you go bankrupt, they will get nothing.
Utilize Balance Transfers
Now that you are paying off debts with a strategy, you can begin to consider using some of the tools at your disposal. The first of these is a balance transfer. With this, the balance you owe on one credit card is simply switched to another provider with better interest rates or offers.
Balance transfers only really work if you read the fine print. Many of them ask you to pay an upfront fee. When compared against the change in interest rates, the money you are paying may work out the same over a yearly period and may not be worth it.
You may find that some of them offer a 0% interest rate for the first year. However, this is only useful if you know you can pay that loan off within 12 months. After this, the rate may rocket upwards, and you will be left in the same position.
Debt consolidation is the process in which you take out a larger loan to pay off all your existing ones. This means you then only have one loan to pay back, making it easier to manage.
This option can only be used by people who still have a good credit rating. However, it does not need to be as good a rating as the one you would need for a credit card. The better your credit, the lower the interest rate will be on the loan.
One plus point of debt consolidation is that the payment plan is quite strictly regimented. You have a fixed-term with a monthly payment. This means you cannot make minimum payments and let the debt spiral out of control.
Getting Out of Debt
In summary, getting out of debt takes discipline. You need to plan your budget, strategy and face up to the debt in front of you. By working away at it, you can begin to snowball your payments and cut down the debt you have.
If you are still struggling after this, then Credito should be your first stop. We help Canadians get fast and easy loans to deal with their debts. Contact us here to discuss your situation and see how we can help you.