Sometimes the lessons we learn in different areas of our lives, like our personal relationships and health, can be applied to issues we’re dealing with in other areas, like our finances. And when I was faced with a major health setback last year, it gave me a whole new perspective on something that many of our clients deal with when it comes to their debt: Guilt. Here’s how we can all learn to drop the guilt and find ways to pay off debt for good!
Last year I was diagnosed with breast cancer — I’m fine now, but I wasn’t at first. When I got the news I spent a lot of time thinking about how I caused this for myself. I was plagued with questions like, how could I have let this happen? How could I have prevented this? What could I have done so that I wouldn’t have to be dealing with this today?
At Credit Canada, our Counsellors speak to many people struggling with paying off credit cards and other debts, and they face these same types of questions. They carry a lot of guilt, anxiety, and regret, and in most cases, it’s the emotional impact of facing a scary issue — like a not-so-great health diagnosis or unmanageable bills with no end in sight — that stops us from getting the help we need.
How Guilt Can Stop Us from Moving Forward
As I was dealing with all the guilt and anxiety that came with my diagnosis, I reached out to my peer support counsellor at the hospital. She told me that I needed to approach it from a place of, “This is where I’m at today, how do I best move forward from here?” It’s a small phrase, but one with very powerful words. It changed my entire perspective and my approach to this journey I was embarking on.
I’ve applied this lesson to other areas in my life where I feel like I’m struggling, and it’s one that anyone struggling with paying off debt can apply, too!
When you’re dealing with something like how to pay off debt, approaching it from a place of, “This is where I’m at today, now how do I best move forward from here?” allows you to move from a position of fear and anxiety to one of empowerment and action. This small shift can make it a lot easier to see potential solutions.
For me, it meant trusting my doctors, doing my own research, doing what felt right to me, and reaching out to my support system anytime I felt like I was losing it. For someone struggling with paying off credit card debt or other balances owed, that support system could be a Credit Counsellor from a not-for-profit credit counselling agency who knows exactly what you’re going through. They could be your ‘go-to’ as you move along your own financial health journey because dealing with such issues can be a form of recovery for a lot of people.
One of my favourite personal finance authors, Shannon Lee Simmons, is all about dropping the shame when it comes to paying off debt, and I couldn’t agree more. So, let’s drop the guilt, move forward, and deal with this issue once and for all. And a great place to start could be something as simple as using a debt calculator, just to get a clearer picture of your own financial situation — diagnosis.
What Is a Debt Calculator? What Does It Do?
A debt calculator is an amazing tool where you plug in all of your unsecured debts into the calculator — balances, interest rates, and monthly payments. Then, the calculator shows you how much it would cost you to pay off the balances owed by making different monthly payments, including just the minimum monthly payment — which, in most cases, is astronomical.
For example, the average outstanding debt balance on a credit card is $3,330. You plug that number into the calculator and you see that it would take you over 25 years to pay it off and cost you over $6,000 in interest charges alone if you were to just make the minimum monthly payment (at a set interest rate of 20%).
This is why so many of our Counsellors say that if you can’t pay your credit card balances in full every single month, call us! Because otherwise, you’re just setting yourself up for future problems. Not paying off your credit card balances in full every month is an early warning sign for future financial issues.
Who Can Benefit from Using a Debt Calculator?
Anyone who has unsecured debts, like credit card bills, and who don’t pay the balances off in full every month can definitely benefit from using the calculator — especially Millennials.
Millennials tend to rank the lowest when it comes to financial literacy. Most younger adults think that as long as they're making their minimum monthly payment, they’re being financially responsible. While this might work for your credit score, you’re locking yourself into paying off debt for many years. Even a $900 balance would take over 13 years to pay off and cost over $1,200 in interest charges (at 20% interest) if you were to make just the minimum monthly payment.
What Impact Does Using a Debt Calculator Have on People?
A debt calculator is a diagnostic tool — and you can’t heal what you don’t diagnose. Not many people know how long paying off debt will take them when they don’t pay off their credit card balance in full each month. So, as a starting point, people need to understand the true impact interest has on their balances owed and the cost of making just the minimum monthly payment.
The calculator can also show you different repayment strategies you can use to pay off debt faster, like the snowball and avalanche methods.
What Are the “Snowball” and “Avalanche” Methods of Debt Repayment?
The snowball and avalanche method are two different methods of repayment that anyone can use.
The snowball method focuses on paying off the smallest balances first. So, you make all of your minimum payments on all of your balances owed every single month (to maintain your credit score), and then whatever money is left over, you put it towards paying off the debt with the smallest balance owing.
Once that’s been paid off, you focus on the next smallest balance, rolling in the payment you were making on the previous debt into the payment you make towards the next balance you tackle (hence, your payments ‘snowball’). This method can be very psychologically rewarding because you start seeing your account balances being paid off one-by-one earlier on in the process as you start to pay off your debts.
The avalanche method instead focuses on paying off the debt with the highest interest rate first. So, you make all of your minimum monthly payments on all your debt balances, then whatever money is left over, you put it towards paying off the one with the highest interest rate. Once that’s been paid off, you use the payment you were making towards the first debt towards attacking the next account with the highest interest rate, and so on.
Using the avalanche method can take a bit longer to see that first debt balance paid off in full, but it yields higher rewards in interest saved.
What’s the Best Way to Pay Off Credit Card Debt?
The avalanche method makes the most sense — it’s the most rational approach because it saves you the most money in interest. However, the snowball method is more psychologically rewarding, which can help motivate people to stay on track with their debt repayment strategy early on, which is when some people can be most vulnerable to giving up.
For people who really like to see those balances owed go down to zero quickly, the snowball method might be the better option. Studies show that the snowball method tends to be more successful because of the psychological benefits and instant gratification related to paying off debt balances in full, faster.
How to Choose a Debt Repayment Strategy
Choosing the best debt repayment strategy ultimately comes down to your personality – what works for you? For some people, getting those quick wins upfront and seeing their balances paid off faster can make all the difference when sticking to their debt repayment plan. Whereas for ‘type-A’ personalities, the avalanche method would be the better option.
The bottom line is that whatever method you choose, the only wrong way of dealing with debt is to ignore it and let it get out of control.
If you’re not sure what method would work best for you, or if dealing with your debt is just too overwhelming, you could always speak to a Credit Counsellor. They can help guide you, do all the number-crunching for you, provide you with the support you need, and set you up with a plan to become debt-free. And the counselling is free and completely non-judgmental.
What Is the Psychology of Debt?
Not all financial decision-making is rational – a lot of it is emotional and behavioural, and owing money can be very overwhelming. At Credit Canada, we see people trying to get their debt under control, but interest keeps accumulating and they just can’t seem to bring the balances down. Finally, most people give up and accept that they’ll never be debt-free. And people can stay in this pattern for years until they start having trouble paying other bills, maybe they start getting collection calls, and when all hope is lost, they end up coming to us for help.
Does the Psychology Towards Debt Change Over Time?
Credit Canada did a study where we asked: What freaks you out more, debt or interest? We found that when you’re young, you tend to care more about the total amount of money you owe versus how much interest you’re paying on that debt. This is because when you’re young, you haven’t had enough time to see the real impact interest has on your balances. But as you get older, you start to care more about the interest rate than the debt itself because you see the very real impact it has on your finances over time.
How Do I Know if I Should Pick up the Phone and Call Credit Canada?
If you owe money to creditors, you’re worried, and you can’t sleep at night, these are all big red flags that you need to call us now! Also, if you’re getting collection calls, living paycheque to paycheque, using credit to get by, or using one creditor to pay off the other, again, these are all warning signs that you’re headed into trouble. (To quote Whoopi Goldberg in the movie Ghost: “Molly, you in danger, girl.”)
The good news is that you don’t have to deal with this alone. We’re here to help, and all of our counselling is free. When facing my own health journey and the challenges that came with it, having someone I could turn to for guidance, know-how, and compassion was monumental for my recovery, and it could be for you or someone you care about, too.
If you’re dealing with debt, but the guilt, anxiety and fear are holding you back from moving forward, Credit Canada can help – it’s what we’re here for.