It can be all too easy to fall behind on debt payments. Whatever the reason, catching up on payments after falling behind can be a daunting task. Once you’ve fallen behind, you may find yourself having to deal with annoying collection calls, ominous notices in the mail, and even a lowered credit score.
So, what can you do? Setting up a credit card debt payment plan is one way to keep yourself on track and catch back up.
Need help setting up a debt payment plan? Credit Canada can assist you!
What are some of the risk factors that can make you fall behind on debt payments? How can you improve your debt management to avoid falling behind? And, if you’ve fallen behind, how can you establish and maintain your debt payment plan to get back on track?
5 Reasons Canadians Fall Behind on Paying Off Debt
There are many reasons why someone might miss one or more debt payments. Some common examples include things like:
- Lack of Funds. If the monthly minimums for debt payments exceed your monthly income, then it’s impossible to make your payments on time. However, if this is the case, it might be time to seek other forms of debt relief—such as a debt consolidation plan (DCP) or even insolvency.
- Sudden New Bills. A problem related to a lack of funds is the sudden introduction of new mandatory bills that you cannot afford to miss. For example, child support payments. Divorce proceedings are often incredibly stressful as it is—both for the parents and the children. After a divorce, you may be obligated to pay child support to your ex or face penalties such as wage garnishment, suspension of your driver’s license, bank account seizures, or even time in jail (in extreme circumstances). When your freedom is at stake, other debts might fall by the wayside. However, if you have excessive debt, you may be able to file for a temporary reduction in child support payments for “undue hardship.”
- Losing Track of Payment Dates. If you owe money to several different creditors and collection agencies, it’s all too easy to forget an important payment deadline. Stress from life events can make this problem worse as sudden, more personal, emergencies take priority and other obligations are forgotten.
- Medical Emergencies. You never know when you might have to make an extended stay at the hospital. Car accidents, sudden infections, workplace injuries, acts of violence, etc.—the list of reasons you might spend a week or more in the hospital is extensive. However, just because you’re in a hospital bed doesn’t make your debts go away. Thankfully, creditors are often understanding of medical emergencies and may work with you to provide some clemency following an extended stay at the hospital.
- Long Trips Abroad. If you travel abroad—whether for work or for pleasure—it’s relatively easy to forget about your bills and debt payments. Alternatively, you may find yourself in a locale where internet access is sparse and you can’t set up manual payments. So, even if you don’t owe a lot of money, you can fall behind on your debt payments and end up facing penalty fees from creditors.
If you find yourself falling behind on debt payments, it’s important to understand what the potential consequences are and how to get out of debt.
It’s also useful to learn what collection agencies can actually do in Canada so you know if debt collectors are crossing the line. This makes it easier to protect yourself as you work on your debt payment plan.
6 Common Strategies for Debt Management
Aside from setting up a debt payment plan or entering a DCP, what can you do to improve your debt management and avoid falling behind on debt payments in the first place? Some effective debt management strategies include:
- Creating a Monthly Budget. How much can you afford to spend each month? What are your absolute minimum necessary expenses? Creating a monthly budget for your expenses can be a valuable first step in controlling debt so you don’t have to set up an extensive credit card debt payment plan to repay the money from using credit cards to cover shortfalls in your budget.
- Cutting Down on the Credit Cards. While having credit cards can help you build your credit history and improve your credit score, they can also lead to temptation. Credit cards make it easy to complete impulse purchases with the mindset of “I can pay it off later.” Before you know it, you’ve added too much to your card, and “later” is “now,” complete with a collection notice! Consider removing the credit cards from your wallet (while keeping the account open to help build your credit history) to avoid racking up debt.
- Using Prepaid Cards or Debit Cards. Need the convenience of credit, but don’t want to rack up debt? Consider using a prepaid credit card or a debit card with a credit logo. Prepaid cards are useful for sticking to your budget since you can’t exceed the spending limit on them—your spending is capped at what you load to the card. Debit cards with a credit logo can be used like credit cards, but draw funds directly from your bank account. Here, it’s important to be careful with your spending so you don’t accidentally overdraft your account.
- Applying for a Debt Consolidation Loan. If you have good credit, you could consider applying for a loan from your bank to pay off your high-interest debt. This can help you save money in the long run and even simplify your debt repayment plan since you would take several debts and combine them into a single payment. However, this strategy isn’t always viable for those living with excessive debt or those with a low credit score.
- Avoiding Eating Out. Everybody expects fine dining restaurants to be expensive. However, fast food restaurants can be an even bigger budget killer over time. Repeated stops at burger chains can make it easy to lose track of how much you’re spending on food. So, instead of stopping by a fast food place, consider buying some lunch meat and bread at the grocery. For the cost of a single burger, you could prepare a full meal at home.
- “Right Size” Your Housing. Home ownership is a major milestone in life. However, when you’re getting ready to buy (or even just rent) a place to live, ask yourself “Exactly how much space do I need?” If you’re living by yourself, odds are that you don’t need a four-bedroom, two-bath home with two acres of yard space. However, if you had a large family, then that might be the perfect place for your needs. Taking a good look at your living needs and minimizing your monthly mortgage or rent by finding a smaller living space can help you reduce housing costs and avoid racking up debt.
How to Make a Debt Repayment Plan
What if you’ve fallen behind on your credit card payments (or any other form of debt)? How can you set up a credit card debt repayment plan and get the collection agencies off your back? Here’s a quick step-by-step guide for setting up a debt payment plan.
Stop Accruing Debt
Before you try to calculate debt payment plan goals and costs, it’s important to do whatever you can to stop accruing new debt. Trying to pay off debt while adding more money owed to your credit cards or taking out new loans is kind of like trying to shovel your driveway in a blizzard. By the time you’re finished repaying your debt from the payment plan, you’ll have a whole new pile of debt to deal with.
So, it’s necessary to create and stick to a monthly budget based on your income—one that covers all of your required monthly expenses and your payment minimums on your debt. Consider cutting up your credit card and blocking your favorite online shopping sites to help yourself avoid the temptation to spend more money than you need to.
List All Your Debts
Create a list of all of your current debts with details about each—how much they are, who you owe, what their monthly minimums and payment dates are, interest rates (if applicable), etc. This information can be incredibly useful for feeding into a debt calculator tool and establishing just how long it will take to pay off what you owe.
Here, it can help to take stock of your various bills and collection notices to firmly establish what your debts are. Organizing them based on total size or interest rate can be useful for setting up your debt payment plan as well.
For example, you could prioritize your biggest debts with the highest interest rates to minimize how much you spend on debt repayment in the long run (known as the avalanche method). Or, you could focus on the smallest debts and once they’re cleared, putting the money for paying those debts towards the next-largest debt (sometimes called the snowball method).
Prioritize Your Overdue Payments
When you start making your debt repayment plan consider prioritizing the debts that are the most overdue (and thus the most likely to cause issues with your credit report). Putting money towards these debts first can help provide some relief from collection calls as the creditors and collection agencies behind them see that you’re making progress on repayment.
Share Your Payment Plan with Creditors and Collection Agents
Once you have an outline of your plan, communicate it with your creditors and their collection agents. You may be surprised at how willing they are to work with you and even back off on the collection calls and notices once they know that you are working towards paying off your debt.
Communication is a key part of dealing with collection agencies and can actually help you avoid stress down the line.
When speaking with creditors, consider asking for reductions in monthly minimums or other concessions that can make repaying your debt easier. Many creditors may provide some debt relief if it means you’ll pay the majority of what they’re owed or to avoid the risk of you filing for insolvency.
Also, be sure to get documentation of your debt from each creditor so you know exactly how much you owe and why. This could help you avoid debt collection scams.
Once you start making payments, it’s important to avoid missing a payment again. One way to do this is to set up automatic payments through your bank—having the money automatically withdrawn and sent to your creditors.
Some prefer to set up automatic payments for when each debt payment is due. Others prefer to have the automatic payments get made on or immediately after each payday. The advantage of setting up automatic payments on or just after payday is that it helps ensure that the money for the payment is in the account and that you aren’t tempted to spend it on other things before the debt payment becomes due.
Alternatively, you could sign up for a debt consolidation plan with a credit counsellor to combine multiple debts into a single payment. Here, the counsellor will negotiate with creditors on your behalf to try to minimize how much you owe, remove interest, and stop collection calls. Instead of having to track several payment due dates, you simply make a single monthly payment—which makes it much easier to track when payments are due.
Need help setting up a debt payment plan or want to join a DCP to make managing your debt easier? Reach out to Credit Canada now to consult with one of our credit counsellors!