What to do if You Want to be Debt Free

Doug Hoyes
by Doug Hoyes January 31, 2016 / No Comments

The average Canadian owes about $1.64 for every take-home dollar they earn. That’s a pretty scary number, but it doesn’t tell the whole story. Some people carry little debt, others carry a massive amount. A mortgage may be considered good debt, but even a mortgage can be too large.

The average insolvent person we see at Hoyes, Michalos & Associates owes almost $1.94 in unsecured debts alone, before considering their mortgage or car loan. That’s credit card debt, bank loans, lines of credit, payday loans, and student loans. That’s debt that carries an average interest rate of about 19% a year. It’s hard to imagine making the minimum payments on that level of debt, never mind ever being able to repay the principal.

So what do you do if you are carrying balances on your credit card every month? What should you do if you want to be free of that type of debt?

Stop using credit for expenses

If you want to live a debt-free life, the first step is to stop using credit to fund your lifestyle. Credit cards are a useful tool, but shouldn’t be used for borrowing. If you’re charging more each month than you can pay in full, it’s time to change your spending habits.  You can make an action plan to pay off your existing debts all you want, but if you continue to spend on credit, you are fighting a losing battle. Track your spending and find a way to balance your budget so you can stop adding new debt.

Pay more than the minimum

Term loans, like mortgages and car loans, have set monthly payments that are designed to pay off these debts within a specified period of time. As long as you meet those payments the debt will be repaid at the end of the term. Unfortunately, the required payment listed on revolving credit like credit cards and lines of credit don’t work that way.

Minimum payments mean that you are paying the monthly interest and very little more. A $5,000 credit card debt will take 21 years to pay off if all you do is pay the monthly minimum. If you want to eliminate any credit card balances, pay as much as you can, as often as you can against these balances to drive them down. Throwing $250 a month against that same $5,000 credit card balance means you will have it paid off in a little over two years.

Lower your interest costs

Sometimes it is possible to lower the interest rate on your existing debts allowing you to pay off those debts sooner. You may be able to transfer your balance to a low-interest credit card. Another option is to consider a second mortgage or debt consolidation loan. There are risks however to converting unsecured debt to secured debt. If you’re concerned you may default on your debt consolidation payments, then consider the next options that will allow you to negotiate or obtain debt relief from your creditors.

Talk to a licensed insolvency trustee

If you don’t think you can repay your debts on your own, then your next best action may be to talk to a licensed professional about debt relief options to get out of debt. A licensed insolvency trustee (the new designation for a bankruptcy trustee in Canada) can explain alternatives like a consumer proposal, which can allow you to negotiate a settlement with your creditors to repay a portion of what you owe. They will help you compare the costs and benefits of a consumer proposal with a debt consolidation loan, credit counselling and can help you explore if bankruptcy is the right answer.

The most important advice is that you need to take control of your finances if you want to be debt free. Understand where your money goes each month, make wise choices about how you use credit in the first place, and deal with any existing balances before they become overwhelming.

Flickr: GotCredit