Debt Reduction 101: Strategies for Canadians

Part of Personal Finance For Canadians For Dummies Cheat Sheet

Believe it or not, there are not one, but two kinds of debt! Bad debt (consumer debt) is money that you borrow to buy things like a new car that you really can’t afford. Think of it like living on a diet of sugar and caffeine: a quick fix with little nutritional value. Getting rid of your bad debts may be even more difficult than giving up the junk foods you love, but in the long run, you’ll be financially healthier and emotionally happier.

Follow these strategies for battling your consumer debt:

  • Use your savings. If you have some savings that could be used to pay off outstanding balances on a high-interest credit card or an auto loan, consider doing so. (Make sure you pay off the loans with the highest interest rates first.) Although your savings and investments may be earning decent returns, the interest you’re paying on your consumer debts is likely higher.
  • Search for money you may have overlooked. Consider borrowing against your cash-value life insurance policy, selling investments held outside of registered retirement plans, borrowing against the equity in your home, and borrowing from friends and family. These are all possible solutions to dealing with consumer debt you may have not considered.
  • Reduce the interest rate on your credit cards. Apply for a lower-rate credit card and transfer any outstanding balances from higher-rate cards. Be sure to check out all the terms and conditions as you hunt for a better rate. In particular, look into how much your interest rate can increase if you miss payments or make them late, and how the future interest rate is determined on cards that charge variable interest rates).
  • Stop making purchases on cards that have outstanding balances. Many people don’t realize that interest starts to accumulate immediately when they carry a balance. You have no grace period (the 20 or so days you normally have to pay your balance in full without incurring interest charges) if you carry a credit card balance month to month.

  • Cut up your credit cards. If you have a pattern of living beyond your means, get rid of the culprit: the credit card. If you can trust yourself, keep a separate credit card only for new purchases that you know you can absolutely pay in full each month. No one needs three, five, or ten credit cards!

  • Consider credit counselling. If you’re deeply in debt, credit-counselling agencies can help work out a debt management program. The Canadian Association of Credit Counselling Services and Credit Counselling Canada can help you find an approved not-for-profit credit-counselling agency in your area.