High-interest credit card debt can be overwhelming. Fortunately, Canadians at any stage of life have options to address their credit card debt with a practical approach that works for them. They can pay off their current debt and develop healthier financial habits for the future.
By honestly assessing your finances and adopting a clear repayment strategy, you can begin your journey to financial freedom. Here we share what strategies are available to help you evaluate your situation, create a repayment plan, and negotiate better deals with creditors.
Step One: Assess Your Financial Situation
Before addressing your credit card debt, it's important to assess your current situation. Begin by listing all your credit card balances along with their interest rates and minimum payments. You might be surprised at how it all adds up when you see it clearly laid out.
Next, sort your accounts in order from high-interest to low-interest. This way, you can focus on paying off the debts that impact you the most.
Relatively speaking, high-interest accounts cost you more over the lifetime of the debt—even if those accounts have lower minimum payments. High-interest debts typically cost more over time, while focusing on lower balances first might provide a sense of accomplishment and financial relief sooner. It's helpful to evaluate which approach aligns with your priorities.
Consider the following strategies as you proceed:
- The "Avalanche" Method: Pay off your credit card with the highest interest rate first. Once that's done, move on to the next highest, and continue this way. This approach prioritizes debts with the highest interest rates, which may result in less paid interest over time, depending on your financial circumstances.
- The "Snowball" Method: Start by paying off your smallest credit card, then move on to the second smallest. This method can help you eliminate monthly payments faster, free up cash sooner, build momentum, and stay motivated as you see those smaller debts disappear.
- Balance transfer: Transfer your high-interest debt to a card with a lower interest rate. Many offer an introductory 0% APR for a limited time. This can help you save money right away. Just be mindful of balance transfer fees and ensure you can pay off the debt before the introductory period expires, if one applies.
- Debt consolidation loan: Consolidate all your credit card balances into a single loan with a low interest rate to save money over time. When done right, this can lower your monthly payments and reduce the overall interest you pay. You may need help from a professional, which we will discuss later.
Step Two: Improve Your Spending Habits
Next, reflect on your spending habits to help determine how you got into credit card debt in the first place. Check your bank statements and credit card transactions to see where your money goes each month.
You might discover you're spending more on unnecessary expenses than you think. Some trouble spots might include:
- Costly habits, such as gambling or nights out
- Subscription services you rarely or no longer use
- Unnecessary grocery and restaurant deliveries
- Impulse purchases
- Online or "in-game" purchases
- Frequent use of short-term debt, such as payday loans
Reflecting on your needs versus your expenses may help identify areas where you could reduce costs or find savings opportunities. Also, search for cheaper alternatives to what you're currently paying for. Reducing certain costs and rethinking spending habits could create more room in your budget for debt payments.
For some, larger adjustments, such as reevaluating housing or transportation costs, may be worth considering as part of their financial strategy. This could mean getting a more affordable car, finding cheaper housing, or even switching careers.
Step Three: Meet with a Licensed Insolvency Trustee
If your debt feels overwhelming, a licensed insolvency trustee (LIT) can give you professional advice based on your situation. The LIT can help you look into options like consumer proposals or bankruptcy if needed. They also provide guidance on restructuring your finances to prevent future debt issues.
Meeting with a licensed insolvency trustee (LIT) is one way to explore available options and consider restructuring your finances. Start here to find an LIT and gain control over your high-interest debt.
Other Types of Support
There are other support options besides an LIT to help you get some debt relief. For example:
- Contact your credit card companies directly. Pick up the phone and have an honest conversation with your credit card companies. Many creditors would rather work with you than risk losing the debt to non-payment.
- Explore debt settlement options. Many creditors are willing to accept a reduced lump-sum payment if they believe it’s their best chance of recovering some of the debt.
- Work with non-profit credit counsellors. Some people find that creditors may consider negotiating reduced lump-sum payments or other repayment terms. Reaching out to your credit card company could help clarify what's possible.
Step Four: Set Clear and Attainable Financial Goals
After assessing your debt and improving your spending habits, you can set realistic financial goals. Start with short-term and long-term targets, like paying off one credit card in a few months or reducing your overall debt over several years.
For instance, one approach, like the 'snowball' method, involves starting with the smallest balances first to achieve quick wins and build momentum. Aim to pay off a specific percentage of your highest balance credit card over one or more years as well. Each milestone you achieve will help keep you motivated on your journey. These goals will work alongside getting help for other factors that may be causing your financial difficulties.
Kick Your Credit Card Debt to the Curb
Credit card debt is common among Canadians, so you’re not alone. But credit card debt does not have to be a curse that haunts you for the rest of your life. Eliminating those first few unnecessary costs and making a plan to pay down one credit card are great first steps.
Remember, overcoming debt is about gradual progress. Don't let short-term mistakes or hardships discourage you. And don't hesitate to reach out for support.