Credit card or consumer debt is one of the biggest financial difficulties facing Canadians today. It’s easy to defer a financial reckoning through the use of credit cards and other tactics, but you could be making it worse for yourself in the long run. It’s especially difficult if you want to save for a house or have other big financial goals. If you’re worried about having such an expensive liability, consider mortgage life insurance to protect your investment.
In the meantime, getting out of consumer debt should be your number one focus. Interest rates can be high and credit cards offer a slippery slope that sinks you deeper into debt. Combat credit card debt now with these tips.
Stop the Spiral
You can’t get out of debt if you continue to accumulate it. Some experts suggest physically cutting up your credit cards or even freezing them in ice to make it harder to use them. Of course, that’s easy advice to give, but what do you do instead?
Try a cash-only envelope system: write out all the categories of expenses you have in a given week and determine how much you spend on each. Make an envelope for each category, withdraw the total from the bank and divvy it into the envelopes. When it’s empty, you either need to decide to borrow from a different category or stop spending on that category for the week.
If you aren’t consistently monitoring your spending, it’s not the best idea to just switch to a debit card or you’re liable to continue to overspend, leading to potential overdraft fees and not having enough for necessary expenses like bills.
Free Up Income
If you don’t have one, it’s time to make a budget. If you do, it’s time to analyze your budget for leaks. Find ways to cut back on your expenses to free up money for extra payments on your credit card debt. Paying the minimum is never a good idea due to interest rates unless you are doing so as part of a larger strategy (we’ll mention two later).
Bring In More Income
If you can’t free up income, or not enough to make the payments you’d like to, consider ways to earn extra income. This is often known as a “side hustle” and can include things like driving Uber or Lyft on the weekends, dog walking, freelance writing, taking surveys, etc. It’s usually less effort or investment than getting a part-time job but can earn you just enough to get ahead on your payments.
Pay Down Debt
Okay, you’ve got the money to make payments, but don’t just throw your money at your credit card debt. You need a strategy. There are three main approaches:
Highest Interest Payment First
This is the more financially sound method because it will result in less money being spent. You pay the minimum on the credit cards with lower interest rates and direct all of your extra payments toward the credit card with the highest interest rate. When it’s been paid off, you move on to the next highest interest rate, and so on.
Snowball Method
Attributed to Dave Ramsey, this method doesn’t look at interest payments, so it can end up costing a bit more long-term, but the benefit is that it typically shows results quickly which can be a psychological boost. In this method you put your extra cash toward the lowest balance credit card and make minimum payments on the others, regardless of the interest. This can help people feel encouraged if they pay a bill off quickly. As with the other method, you’d then roll the extra money (and whatever you were paying toward that credit card) toward the next lowest balance.
Consolidate
A third option is to consolidate your credit card debt, either formally through a loan, or if your debt isn’t high and you qualify for another credit card with a low interest rate and high balance, to pay all your credit cards off with the new card so you only have to worry about making one payment at all.
More Options
While in most cases the above strategies should be enough to get you on the right path, sometimes more serious intervention is needed. If you have significant consumer debt, you could consider the following, although we recommend talking to a financial advisor before making a decision.
Debt Repayment Program/Consumer Proposal
Both of these options involve a financial professional who negotiates with your creditors to lower interest rates or the principal balance of your debts. They will affect your credit score.
Refinance Your Mortgage
If you refinance your home you could use your home as a line of equity to pay off your consumer debt. This is a form of consolidation, but a tricky and riskier one. It does act as a delay to dealing with your debt, and should be used in conjunction with the strategies above to make sure you do not accumulate more debt.
If you are interested in refinancing your home, consider discussing mortgage life insurance with one of our agents to see if protecting your investment might be an option for you.
Contact Us
If you are trying to get out of debt so that you can make a major purchase like a house, you may want to explore options for coverage of those liabilities while you are doing your research and making your plans. 20/20 Mortgage Life Insurance offers a variety of products and options, and we are up to 25% cheaper than the banks. Use our online form to address any questions you may have.