If you are like many Canadians, you probably spent more than you planned on a purchase, on vacation or because of an unexpected financial emergency. Now you are dealing with debt, it’s more than you can handle and you are looking for ways to reduce your debt.
Debt reduction is possible on your own with time and persistence. Or you may need professional advice and debt reduction alternatives. Here are six great ways to reduce your debt ranging from self-help solutions to professional debt relief alternatives.
How To Reduce Your Debt
1. Don’t skip a payment.
You can reduce your debt faster if you avoid interest and penalty charges. Credit card and mortgage companies often tempt you with “skip a payment” offers. Our first advice related to you dealing with your debts is: don’t fall for it. All you are doing is adding interest on interest. Your debt increases, and with credit card rates averaging 18%, you are digging yourself into a hole.
2. Pay off more than the minimum debt payment.
The minimum payment may be easier on your cash flow each month, but it comes at a heavy cost: huge interest costs keep you in debt longer. When you make only the minimum payment each month you pay more in financing charges in the long run. Let’s say you owe $1,000 on your store credit card at 18%. You pay the minimum which is set at interest plus 1% of the balance. Your monthly payments start at $15 and go down from there as you pay off your debt. Pretty easy right? Unfortunately at this rate paying off your debt will take you 113 months (that’s almost 9 1/2 years!) and you will have paid $923 in interest — almost doubling the cost.
Under the same scenario, if you can pay $100 per month, you can reduce your debt to zero in less that a year (11 months) and the interest cost is $92.
3. Debt Snowball or Highest Rate?
There are two theories of how to reduce your debt faster. The first, and usually most recommended method, is to pay off high interest rate loans (usually high interest credit card debt) first. Why? Because the higher the rate the more you pay in financing charges. Reducing this debt first saves you money in the long run allowing you to pay off your debt faster.
The debt snowball repayment method is another way of dealing with your debt. This method recommends that you pay the smallest debt first. Once this debt is paid off, you move on to the next smallest debt in terms of size. Why? This method provides quick results that you can see. By paying smaller debts first, you see fewer bills coming in each month as more and more individual debts are paid off. This debt reduction method works well because it gives you positive feedback to stay motivated to pay off your debt.
Whichever the method, be diligent. Make payments every month to the maximum you are able and your debts will be eliminated.
4. Get a debt consolidation loan
A debt consolidation or home equity loan can help you reduce credit card debt. The interest rate charged will generally be lower on your consolidation loan allowing you to reduce your debt faster. Beware however of the debt consolidation trap. Many get a debt consolidation loan, pay off existing debt, and then ramp up their credit card debt again. If you need to consolidate your debts, once you do, get rid of any extra credit cards and only use the ones you keep if you can pay them in full each month.
5. Make a deal with your creditors
If all else fails and you still cannot make your payments, filing a consumer proposal may be required. A proposal is a deal that you make with your creditors, and is often used to combine all of your debts into one monthly payment. Consumer proposals can only be filed by bankruptcy trustees licensed by the government.
If you need help reducing your debt it’s time to talk to a professional. Contact an advisor today for a free debt evaluation. And remember, once your debts are paid off, keep them paid off.