Remember when you got your first credit card? You probably felt like you were holding financial freedom in the palm of your hands. You may even recall how exciting it was to swipe that slim piece of plastic for the very first time.
Perhaps you signed up for it in college or university because you were tired of your ramen noodle diet. (Plus, it came with a free Molson Beer Cozy!) Or maybe a car breakdown forced you to break down too, finally applying for one so you can afford the repair.
Either way, you probably thought, "Financial independence is mine!"
But one card turned into two cards, and two turned into twenty. Now, your fantasy of carefree spending has become a reality involving overwhelming debt, colossal fees, and collection calls.
If this sounds like you, take comfort in knowing you’re not alone. The average Canadian now has nearly $22,000 in non-mortgage debt, up almost 2% from the previous year.
The good news for you and millions like you is that help is out there, and we understand what you’re going through. So without further ado, here are five steps you need to take to get on the road to financial recovery, with valuable tricks and tips along the way.
It’s no secret that credit card interest rates can climb higher than Mount Everest. Canadian banks are now charging an average of 20 to 23 percent on their most popular credit cards. That’s a full four to seven percent higher than our neighbours to the south!
But to be debt-free, we can’t sit and wait as regulators hem and haw over the best way to improve the debt crisis in Canada. We have to take action now. Because every month that your balance isn’t paid in full, interest fees add up and your debt increases.
That’s why it’s important to take a look at all your credit cards and identify which ones have the highest interest rates and balances. So grab that stack of credit card bills off the kitchen counter, take a seat (and a deep breath), and dig in. Our handy debt calculator can also help you gain a better understanding of your current debts, and it’s free to use.
You can’t move forward with credit card debt holding you back. So it’s time to put away the cards. That means all of them—yes, even that so-called “emergency” card. Because as you know all too well, debt can add up faster than you can say “credit please”.
So put them away, lock them away, or do it Canadian-style and freeze them in ice! By the time that ice has melted, you’ll have had plenty of time to re-think your spending patterns and the consequences of those actions. (And no cheating—put down that blow dryer!)
Remember, it’s important to reward yourself occasionally too. If positive reinforcement can work on kids and pets, it can work for you as well! Each month that you don’t use your credit cards, treat yourself to something you’ve temporarily sidelined, but keep it within reason. Maybe it’s catching a matinee, splurging on one designer coffee, or picking up a box of those Timbits you’ve been craving.
“Remember, it’s important to reward yourself occasionally too. If positive reinforcement can work on kids and pets, it can work for you as well!”
However you choose to keep the cards at bay, you’re now well on your way to ensuring a better financial future. But we’re not through yet...
Now this is where things start to get real: determining how much money you have available in your budget to start paying down your debt.
Creating and implementing a monthly budget allows you to clearly see how much money you have coming in versus how much is going out. It also gives you an understanding of just what you’re spending money on each month, which can be a real eye-opener for some folks. Armed with this information, you can begin to look at expenses you can cut completely, or at least cut corners on.
“Creating and implementing a monthly budget allows you to clearly see how much money you have coming in versus how much is going out.”
Need a little help? From packing your own lunch to DIY manicures, saving money is easy when you’re open-minded.
Here are seven ways to save money and pay down those debts:
Sell unused items online.
Got old hunting and fishing gear in the garage? Or outgrown kids’ clothes and toys in the attic? Turn them into cash with one of these 5 popular Canadian eCommerce site.
Buy generic grocery and household items.
This may seem like a no-brainer, but many people are as addicted to name-brand goods as they are to their credit cards. But want to know a secret? Most store brand products are the exact same as their name-brand counterparts, just different packaging. Plus, if the ingredients are similar, you’re not likely to notice the difference—and you could save up to 25 percent on your grocery bill. Apply this rationale to clothing and save even more!
Use public transportation.
We know, you love your truck. But do you need to take it everywhere? Consider public transit to get to work or school and back. And take advantage of warmer days to walk or bike.
Reduce your mobile phone plan.
Can you do without a few extra gigabytes of data? Or have you shopped around for a cheaper plan that’s got everything you actually need? If you cut your phone bill even by just $10 a month, that’s $240 over a 2-year contract.
Insulate your home.
Canada is known for its cold weather, and air sealing attics and basements can save you hundreds of dollars per year in heating costs (and keep you warmer). If you’re handy around the house, do it yourself to save even more.
Cancel your gym memberships or magazine subscriptions.
Could you do some of those exercises at home instead? Maybe a YouTube video could be just as helpful. And are you really reading those magazines, or are you just catching up on the latest news and gossip on your phone anyhow?
Still don’t think you can make a dent on your debt quickly enough? Consider a part-time job; as an additional bonus, and depending on the company you work for, you could get discounts on food, clothing, or other essentials to help defray your everyday expenses.
If you don’t have the ability to take on another time-intensive job, the “side hustle”—such as picking up work as a podcaster or a dog walker—has become an art form for today’s millennial generation.
Earlier you identified which credit cards were digging deepest into your pockets or purse; now it’s time to begin paying them off. There are typically three methods of debt repayment:
1. Snowball Method
With the snowball method, you pay off the smallest debt first, regardless of interest rate, while still making minimum payments on your other cards. Once that balance is paid off in full, you move onto the next smallest debt, and so on. Some people prefer this method as it may allow them to eliminate some cards quickly, giving them fewer to focus on and more motivation to continue.
2. Avalanche Method
With the avalanche method, you focus on paying the card with the highest interest rate first, again while maintaining your minimum payments on your other cards. Once it’s paid in full, you move onto the next highest-interest rate card. This strategy slows the rate at which your current outstanding debt grows due to interest, although it doesn’t usually offer the immediate gratification of paying off a card card balance quickly.
Both the snowball and avalanche methods have their merits and supporters. It really comes down to your own personal finances, and to an extent, your personality.
One important thing to remember when choosing one of these approaches:Make additional payments when you can. Despite what credit card companies may have you believe, you can make more than one payment each month. So if you come into some money, put it towards the card; if you’ve already met the minimum payment that month, the entire amount of extra money should go towards the balance! You could save yourself hundreds of dollars in interest costs.
3. Debt Consolidation
A Debt Consolidation Program (DCP) is a straightforward process to a stress-free, debt-free life. It involves combining all of your unsecured debt, such as credit card debt and payday loans, into one simple monthly payment. Additional benefits of a DCP include individual consultation with a certified credit counsellor who can negotiate with your creditors for you. They can usually get creditors to stop or greatly reduce your interest rates and lower your monthly payment.
Whichever approach you take towards eliminating debt, congratulations on your commitment to making it happen!
What’s the best part? It’s not forever! We’re not suggesting you permanently cut the credit card umbilical cord for good—just until you’ve managed your debt. This repayment process is designed not just to eliminate debt, but to also teach you the ins-and-outs of credit card management; that way, once you’ve unlocked or de-iced that plastic you can wield it around town with the confidence of a responsible credit card user.
“We’re not suggesting you permanently cut the credit card umbilical cord for good—just until you’ve managed your debt.”
Here are a few more tips to help you continue to “play your cards right” at the end of the debt repayment process:
Pay your balance every month on time. This will avoid those dreaded interest fees and also help raise your credit score.
Set up automatic payments. This ensures you never miss a payment, incurring late fees and impacting your credit score. Remember, you can always make an additional payment, so if your automatic payment didn’t cover the balance, manually pay the rest.
Download your credit card apps. As you know, it’s easy to get carried away with credit cards. Being able to view your charges in real-time with just a glance at your phone will ensure you don’t go over your monthly budget.
Never—and we mean never—get a cash advance. That ATM ka-ching comes at a cost. Here are three reasons cash advances are the ultimate no-no:
Transaction fees. You’ll usually pay this not once, but twice (one fee from the ATM and one fee from the credit card).
Interest rates. Cash advance rates are generally much higher than purchases, usually hovering around 29 percent!
Immediate interest accumulation. Unlike purchases, interest begins adding up the moment the ATM spits out the cash. So even if you are paying your balance every month, you’re still going to pay interest on that advance no matter what.
Finally, we always recommend setting up an emergency fund. When a true emergency arises (we’re talking about car troubles or a job loss—not those stylish new boots), you can pull from your own funds without reaching for the credit cards.
Of course, you may realize life without credit cards isn’t so bad afterall. If you ultimately decide to give them up for good, more power to you!
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