This is part two of our 5-part series for Financial Literacy Month
Debts can be like birthdays—whether we ignore them or not, they won’t go away. Although it may sometimes be tempting to take an avoidance strategy like not opening those ominous statements, this will only make things worse as debt and interest rates add up. With interest rates in Canada continuing to rise, keeping up with your payments can become an even more onerous task.
In order to pay off your debt, your best bet is to develop a plan that will help you deal with the debt and ultimately build your confidence as you see your debt decrease.
Ready to make a game plan? Here’s how to start:
- Pay your highest interest charging debts first
Make a list of all your debts along with the interest rate you are paying and your minimum payments for each month. If you have multiple sources of debt, continue to make the minimum payments on all your debts, but accelerate your payments on your highest interest charging debts.
- Explore a consolidation loan
If you have multiple debts all charging high interest rates, talk to your financial institution about taking out a lower interest rate consolidation loan to pay these off. The amount and interest rate that they charge on a consolidation loan will largely depend on your credit history. If you adopt this strategy, stop using the cards you have just paid off. Continuing to use credit card will defeat the benefit of a consolidation loan. Remember to keep any government student loans separately, as consolidating will prevent you from accessing the Repayment Assistance Program (RAP) and tax credits for student loan interest.
- Go on a cash diet
One of the hardest tasks is trying to pay down your debt while you are still using credit cards. Hide credit cards in a safe and secure place where you will not use them and move to a cash diet for all your purchases. If resisting is too hard, cut them up.
- Cancel your retail credit cards as you pay them off
Credit cards issued by retailers are great—but only for the retailers that issue them! Interest rates can often reach into the 25% to 29% range, meaning that the money you owe on these cards can spiral out of control.
- Choose your lenders wisely
Some lenders may allow you more favourable lending terms. You may also want to shop around to see if there are better rates on lines of credit or other debts you owe. Avoid predatory lenders—the vultures of the financial world—at all cost: these lender prey upon people who can least afford to pay their high rates. Products to avoid include payday loans, installment loans, and rent-to-own offers. That’s because they charge high interest rates along with hefty penalties when you don’t pay them back on time. Interest and fees charged on these products can mean you’re effectively paying anywhere from 60% to over 500% annually!
Family Services of Greater Vancouver’s can help you with your financial well-being, including strategies on paying off your debts. We have workshops and one-on-one financial coaching to figure out your financial goals and how to achieve them. Email firstname.lastname@example.org or call 604-638-3991 to get in touch with our team and learn more about how we can help you with your financial goals.
Murray Baker is a Financial Facilitator and Coach, Financial Empowerment, with Family Services of Greater Vancouver. He is also a speaker and author of the bestseller The Debt-free Graduate: How to Survive College Without Going Broke, now in its 14th edition.