how to reduce credit card debt

How to Reduce Credit Card debt in Canada

Credit cards are omnipresent in today’s society and are integral to every financial transaction from Uber Eats to travel bookings. When used responsibly, credit cards are excellent financial tools that enable the cardholder to obtain travel points, receive cashback offers or earn rewards.

The dream of building credit for future purchases can quickly spiral into a nightmare when you carry a considerable balance on your credit card. Cardholders need to be cautious because credit card debt is one of the worst types of debt, often costing north of 20% interest rates.

If you have a balance on your credit card, paying it off should be of utmost priority. Below are methods to reduce credit card debt in Canada.

Review your spending habits

This tip might seem apparent to some, but you can’t make something better if you don’t know how it works. Typically, people in credit card debt fail to look at their spending and lifestyle, but that is the first area they need to improve to get out of credit card debt.

Many Canadians only account for a little over 70% of their spending, while the rest gets lost in the details. The remaining 30% of expenditures contain critical information that throws light on how you got into debt in the first place.

Whether it is pedicures at the salon, or a round of drinks after work, knowing all the details about your spending will enable you to plot a strategy against future financial entrapment.

Budget your spending

Now you have a clear idea of your debt profile and how you’re spending your cash, you need to create a budget. Creating a budget need not be a complicated affair as there are numerous budgeting apps and calculators that can help you budget with ease.

You can use a budgeting app to enter your income and log your expenses to see how your inflow stacks up against your outflow. Itemize every expenditure, including utilities, rent, mortgage, groceries, and your current credit card debt.

Despite being in debt, it is still of utmost necessity to stash away cash for unforeseen situations. That way, you won’t be stuck between a rock and a hard place when you’re confronted with an emergency.

It doesn’t surprise the reluctance for many people to budget, but you can budget easier when you spend less, putting little money aside for guilty pleasures. Whatever you do, plan for the long term as you can only tighten your belt for so long.

Pay above the minimum

Credit card companies are incredibly clever; they tell you to pay 2% of the previous month’s bill, and you’re fine. What they don’t tell you or what gets lost in the fine print is that the rest of the debt piles into the interest at a rate of 20%, excluding the principal.

Though it might take donkey years to pay off your credit card debt paying only the minimum, that only means more profits to the bank and more money finding its way out of your pocket. Your best strategy is to find additional money and add it to your payments. With consistency, you’d achieve significant results.

Apply for a lower rate

It is possible to rejig your credit card debt and ask for a lower rate. It might seem unlikely, but the bank is more than willing to give you a listening ear because they’d be in a far worse position if you defaulted entirely on your debt.

Therefore, It is in their best interest to give you a rate you can afford to pay. You’d be more successful as a loyal customer with a demonstrated history of complete and timely payments. For instance, you can get a copy of your credit report and demand a lower rate. The worst that can happen is that your application will be rejected, but it doesn’t hurt to try.

Balance transfer promotion

Like many businesses, credit card companies and banks often run promos to attract more customers. Some of these promos often come in low-interest credit card rates, typically from zero to less than two percent for a trial period. You can opt for these low rates to give yourself more space to pay off your debt.

Be mindful that even at zero percent interest, it will cost you to make a transfer – let’s say something in the range of 3%. That means a C$2000 debt will cost you C$60 in transfer fees.

Once the promotion runs out, you’ll start to pay the regular interest rate attached to the credit card. It would help if you strategized adequately to maximize the best value out of a balance transfer.

Switch to a low-interest credit card

Once you review your spending habits and start a budget, it might become apparent that you could be in debt for months. If that’s the case, you might consider shopping for a low-interest credit card.

These credit cards have little to no perks, but they can help take percentage points off your interest purchase. The rates vary per card but are often half the percentage of a standard credit card.

Use the Avalanche Method

If you’re in debt with multiple creditors, the avalanche method is a debt repayment strategy that allows you to consolidate your debt, paying the minimum.

The extra cash flow will be applied towards the debt with the highest interest. By whittling down the highest interest, you’ll be paying lower interest in the long-term.

Use the Snowball Method

Another strategy is to pay off your debt according to size. You’d start by prioritizing the most considerable debt without considering the interest rate. You may pay more in the long term, but you’d be happy knowing you’re not so knee-deep in debt. 

Home Equity Line of Credit

If you are a homeowner and aren’t successfully implementing a balance transfer, you can utilize a Home Equity Line of Credit to pay off your credit card debt. Because of the considerable credit limits and affordable interest rates, HELOCs are an excellent way to pay off credit card debt.

Many homeowners have a HELOC factored into their mortgage. The payments you make towards your mortgage frees up the lending room that your bank can extend to you as a credit line. The consequence is that many people have an extensive line of low-interest credit that can be used for debt consolidation without the hassle of applying for a fresh loan.

You must be mindful that using the HELOC method is a viable option only if you can quickly repay your debt. A HELOC is secured against your house, and defaulting on your payments can render you homeless.

Debt Consolidation Loans

Debt consolidation loans allow you to use the principal sum to offset your credit card debt while you make a monthly payment over a fixed term until your loan is paid off in full. This method provides you with cheaper rates even though it isn’t as good an option as a HELOC or balance transfer.

Watch out for lenders offering low superficial rates with expensive fees and unfavourable terms that can put you in a far worse position. Conduct your research and go shopping before settling on a debt consolidation loan.

Be Wary of Debt Consolidation Companies

Debt settlement companies specialize in negotiating with creditors to reduce your outstanding debt. Even though this is rare, it is possible, but you’d still take a significant blow to your credit score and most likely charged exorbitant fees for it.

On the other hand, debt consolidation companies manage your debt by distributing your monthly payments across your creditors. A debt management plan isn’t a bright idea because it will pull down your credit score.

The debt consolidation company will also charge you a fee that will make you reconsider why you signed up in the first place. The best way to manage your debt is to do it yourself.

Sell your stuff

If all else fails, you can always sell the stuff you don’t need. You can sell valuables that you own but isn’t of any significant use. That said, ensure you don’t sell things that help you earn an income or stuff you need because you might end up repurchasing these items at a higher price.

The money you get from selling these items can go a long way to paying off your credit card debt. At the end of the day, paying off your credit card is an excellent way to regain the reins of your finances and expenses. Ensure you pick the right option that is best for your financial situation.

Get a Side Gig

We live in the Gig economy and many Canadians are taking advantage of all it has to offer to reduce debts, build credit and live comfortably. You can take advantage of the many side gigs in Canada including Uber driving, food delivery and rendering freelance services to make a healthy income on the side.

In fact, while writing this article, we spoke with a few Canadians who were earning over $30,000 CAD annually in just side income. One was doing food delivery after work with his used car acquired at $3800 and another was offering digital marketing services on Upwork. It’s not easy combining full-time work/study and a side gig, but it is doable!

Start Couponing

People who coupon religiously swear by it! Extreme couponers claim to save thousands of dollars monthly on groceries and other in-store purchases. Given that the cost of living in Canada keeps rising so much that wages are finding it hard to keep up, good couponing strategies and skills might just save you from drowning in a pool of debt. A good place to start will be reading all about couponing and joining frugal communities on Reddit.

FAQs

How can I pay off my credit card in Canada?

You can pay off your credit card debt by putting additional money into your payments, starting with the highest interest debt. Once that debt is paid off, proceed to the next debt with the highest rate.

How can I legally not pay my credit card debt?

If you have insurmountable debt, you can contact a Licensed Insolvency Trustee (LIT) to handle your file. If you can’t afford one, you can seek help from the OSB’s Bankruptcy Assistance Program. Note that once you declare bankruptcy:

  • Payments to your unsecured creditors will stop.
  • Garnishments against your paycheck will cease.
  • Lawsuits by your creditors against you will be dropped.

What is the downside of filing for bankruptcy in Canada?

One of the downsides of declaring bankruptcy in Canada is the cancellation of credit cards in your name. It will also be challenging to get a loan with excellent rates, and your credit score will hit an all-time low.

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