Dealing with Debt

What Is the Best Way to Handle Credit Card Debt and Debt Repayment?

Do you want to know the steps for the best way to handle credit card debt and debt repayment? Paying off credit card debt is one of the biggest financial hurdles Canadian consumers grapple with. Between hefty interest rates and making only the minimum payments each month, it’s hard to get out of debt. If you’re determined and keep organized with your accounts, getting out of debt is an attainable goal. Here’s how to do it:

Figure Out How Much You Owe

Your first step in managing your debt is taking stock of all of your accounts – namely, which creditors you owe money to and how much, your due dates, the interest rates for outstanding debt, and any penalties or late fees.

Getting a copy of your credit report may be a wise move in case you’ve forgotten about some outstanding accounts. Put your documentation in writing – looking at the debts all tallied up and getting a firm grasp on all of your accounts will help you plan your next steps.


Create a Debt Repayment Plan Within Your Budget

Now that you’ve assessed the damage, you’re almost ready to carve out a debt repayment plan. How much you can afford to put towards your debts every month depends on what’s feasible within your budget.

Your budget typically takes into account all of your fixed expenses, like rent, bills and transportation costs, along with your discretionary spending on categories like groceries and entertainment. When debt repayment is a major priority, this needs to reflect in your budget. However, avoid slashing expenses drastically right from the start to come up with funds to put towards debt. While you need to ensure you’re earmarking enough of your income to paying all your creditors, you also need to make sure you don’t neglect other essential expenses. All of this needs to be worked into your budget.

Tip! Savings is crucial to getting out of debt – here’s why.

It will take some juggling to get your budget to balance, and that is why we created this free, downloadable interactive budget spreadsheet. It can help you adjust numbers in real time.

Related: How to Budget and Create One That Works

Decrease Your Interest Rates

Get on the phone and call your creditors to ask them for a lower interest rate. While this may seem like a scary step, it could pay off in spades if, for example, a credit card company is willing to drop your interest rate on your debt from 29% to 19%, or even more. This proactive move could help you focus on paying off your principal debt instead of lots of interest. While there’s no guarantee what they’ll be able to help you with, you don’t get if you don’t ask.

Practice before you phone – write down the creditor, how much you owe, your current interest rate, and what you’re hoping for. Let your creditor know if you’ve fallen into hardship with for instance, a job loss or health crisis, and tell them how much you’re able to pay them each month to get your debt paid off. It is crucial that you are honest with them and have the ability to follow through with whatever you promise. Reneging on your promise will only make things worse in the future.

Important! If you have not made payments in a period of time, or want help to prepare for a phone call with your creditors, contact us before you communicate with your creditors for important information that could impact your debt repayment. Call us at 1-888-527-8999, email us, or chat anonymously online.

Choose the Best Strategy to Pay Off Debt

The best strategy to pay off debt is the one that works for you. And thankfully, there are handfuls of ways you can pay off your credit card and other debts. Some consumers may choose to tackle their highest-interest credit card accounts first while making the minimum payments on the others. Once that card is paid off, all debt repayments are then funnelled onto the next highest interest card. This is called the avalanche method.

Others may prefer to address debts with the lowest balance first, while making minimum payments on the others. This is called the snowball method. In this instance, consumers may get a boost from wiping out a single debt at a time and the desire to maintain the momentum.

Snowball vs Avalanche, Which Is Better for Paying Debt Off?

Consider Debt Consolidation – There Are Different Types

Debt consolidation is another option if you have hefty debt loads, and there are different ways to consolidate your debts. If you have access to a low interest credit card, or qualify for one, it might be an option, but credit card debt consolidation can quickly lead to a never-never plan. Debt consolidation with a line of credit can lead down the same path if you’re not extremely diligent about using it as a debt repayment tool.

The reason for this is because credit cards, lines of credit, and overdrafts are examples of revolving forms of credit. You can use them, make a payment, and use them again – over and over. If you want to borrow money to pay off your debts, ask your lender about a debt consolidation loan at a reasonable interest rate instead.

Another type of debt consolidation is a debt management program. In this instance, you’d work with one of our Credit Counsellors to combine your payments into a single, affordable, monthly sum based on your budget. Don’t worry, the Credit Counsellor will help you figure your budget out, and if it’s a good option for you to consider, the Counsellor explains the program in detail. If you want to know more, give us a call and we’ll be happy to answer your questions.

Automate Your Payments

Now that you’ve chosen a plan of attack, you need to stay on top of when payments are due. The wisest decision you can make is to automate your payments so you don’t miss any. This can be accomplished in 2 ways:

  • Use automatic calendar reminders to tell you when to manually make your payments
  • Set up automatic payments on specific dates through your online banking system

Missing a payment on your credit card could trigger major setbacks, such as increased interest rates, late fees, missed payment penalties, and a mark on your credit report. It’s better to be safe than sorry – automate or consistently remind yourself if a due date is coming up.

Break Up With Your Credit Cards

Now that you’ve vowed to pay off your debts, could you break up with your credit cards? To stay on track with your plan you probably need to. A cash-only diet means you’ll put away your credit cards and rely solely on the funds that you have on hand. This is a disciplined measure that’ll help you stick to your monthly budget and bar you from accumulating more debt.

Each time a card is paid off, you can choose to close the account down or not. Ultimately, you really should only need two credit cards – one that you normally use, and another as a backup or for online purchases.

12 Tips to Use a Credit Card and Not End Up In Debt

Track Your Progress and Celebrate Your Milestones

Document your progress by checking in on how much of your debt you’ve paid down or paid off in full. Through online banking you should be able to compare your progress to actual balances to ensure they align.

Celebrate each time you hit a checkpoint, such as paying off a set amount or half of a debt, or a credit card account as paid in full. Debt repayment isn’t an easy endeavour and you deserve a pat on the back for all of your efforts.

What if milestones seem out of reach? If you aren’t staying on course, try to pinpoint why. The best way to do this is to track your actual spending for a few weeks. There can be any number of reasons why you might have trouble getting your debts paid down; a DIY repayment plan doesn’t work for everyone.

Plan Your Next Steps When Debt Freedom Is In Sight

If you’re nearly debt-free, start to consider your next steps because you’ll have freed up a chunk of money once dedicated to debt repayment. Do you want to allocate it to beefing up an emergency fund, saving for a trip, or other short- and long-term goals? Now’s the golden opportunity to dream big with your debt-free future.

Whenever you think you’ve paid a debt off in full, check with your lender to verify that that is indeed the case.

Where to Get Help with Credit Card and Debt Repayment

If you need help with debt repayment for credit cards and loans, you’re not alone. Thousands of Canadians struggle with their debts, and we are here to help. Our professional, friendly Credit Counsellors are just a call away. Our appointments are free and confidential, and you can talk to a Credit Counsellor in person or over the phone. Contact us now to make an appointment or ask us some questions. There is a light at the end of tunnel; we’ll show you how to find it.

Related articles:

How Do You Pay Off A Credit Card?

12 Tips to Use a Credit Card but Not End Up in Debt​​​​​​​

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