Whether it’s taking out a new mortgage for a home purchase or a lease on a new car, we all need to borrow money at times. That being said, debt – and credit card debt in particular – has become a growing concern for many Canadians. A recent analysis by TransUnion showed that average non-mortgage debt for Canadians is now over $21,000. And, unfortunately, that average continues to grow. Yikes.
How you manage your debt makes a huge difference in how quickly you pay it back and become debt free. Here are some ways you can gain control of your debt, so that the debt doesn’t start to control you.
Good vs Bad Debt
The Good – Ideally, the best kind of debt is none at all. But realistically, many people do have long term debt such as a mortgage and younger people often pay down a student loan over a longer period. It’s important to highlight that these are good types of debt. These investments usually pay you back, so long as you’re getting a good rate and haven’t overextended yourself.
The Bad – The bad debt is the debt that sits on your credit card – it’s high interest and usually can be attributed to just “stuff.” It’s also become quite a sticky situation for younger generations in the last decade: In a recent survey, 27 percent of millennials spent more than half their disposable income using credit cards. And 95 percent also report having at least one credit card, compared to 80 percent of their baby boomer counterparts. If you aren’t able to pay off your balance each month (or a month or two), you’re going to start getting yourself in trouble.
Get rid of bad debt for good
If you’re carrying balances on several credit cards, consider paying the highest rate first. While it may seem easier (read: less intimidating) to pay off smaller balances first, the debt from the higher rate credit cards will cost you the most over the life of repayment.
You may also want to consolidate your debt. There are personal loans available at lower rates than what your credit cards are charging you. By bringing all debt together, and at a lower rate to boot, your life will get more manageable – and a whole lot cheaper.
Not seeing the bigger picture yet? Well, let’s say you have an outstanding credit balance of $5,000. If you were to pay it off with a personal loan rate of five percent instead of your credit card at 19.9 percent interest, you would save $1,812 per year. So not only would you be saving money, but you’d be able to pay of your debts faster. See, that situation got a whole lot less scary.
To get an idea of how much you can borrow and what your repayment schedule might look like, check out our nifty loan calculator.
If the weight of debt is nagging you, schedule a Where You’re At Money Chat with a finance expert, who can help make sense of your money situation, provide easy-to-understand advice, and give you a tangible plan for hulk smashing your debt.
A few final tips
- Be disciplined about your loan payments. You’ll not only chip away at your debt, but you’ll improve your credit rating. This will give you access to better interest rates in the future.
- In addition to saving money on interest payments, you’ll want to make sure your debt payments are covered and credit rating is protected. If something were to happen to you, like illness or injury, getting loan protection will make sure your payments are taken care of.
- To achieve a good credit rating, use credit regularly, but not too much. Watch the number of credit cards you have (two or three should be enough). And use them regularly, but don’t max them out.
- Experts recommend keeping your balances at least 35% below your available credit limits. If possible, pay them off in full, every month. After all, there’s no better interest for debt than 0%.
So what now?
If you’re in debt and having trouble keeping your head above water – we can help. Denying or hiding your debt is only going to quell the problem short-term. A personal loan can help consolidate the credit card debt. Plus, it will get you to debt-freedom sooner, and with a lot less interest. Learn more about your loan options here. Or schedule an appointment with one of our banking specialists – they’re happy to help.