Everyone has debt. Well, mostly everyone. So don’t feel ashamed. Credit Canada indicates that the average consumer in Canada has around $20,739 in debt.And like others you may be feeling overwhelmed with how to pay it back. Trying to pay down interest and principal to each of your debts might be running your budget off the rails.
Here’s what we’re going to cover:
- Put all of your debts on the table: get a clear picture of what you owe, what interest you pay, and what your minimum payments are and when they’re due.
- How to calculate interest
- How to pay off debt in logistical order
Hint: pay your biggest interest payment debt first
- How to manage unmanageable debt
1. All Your Debts on the Table
2. How to Calculate Interest
A note before we continue: some credit facilities are deceptively less or more in interest. You’ll need to consider things like grace periods and compounding interest to better understand what you’re paying on your facilities. If it isn’t clear by looking at a statement, a quick call to your bank or credit union should help clear it up.
If you failed math in high school don’t worry, we’ll outline the formula for you so all you have to do is plug it in on a calculator. The formula is:
Divide X by 12.
3. Pay Off Your Debt in the Most Logical Way
You may have a situation where you pay, for example, a car loan that has a fixed monthly payments of $400. Continue to pay that as you have been. These payments are not typically flexible since it is a term loan, meaning it’s only meant to last for a certain period of time i.e. five years. The same example is pictured above with the person loan – there’s a set monthly payment that you can stick with until you have a lump sum that you can apply, if you choose to do so.
But for payments that are flexible, such as credit cards and lines of credit, you can reduce your payments to those and turn your budget to, again, the most expensive piece of debt that you have.
The idea is to pay off that most expensive one first so that you don’t accumulate more debt by accumulating more interest. Make sense?
So your payments might look something like this:
4. Managing the Unmanageable
A way to check your stress meter is to check your TDSR which stands for Total Debt Servicing Ratio. This is basically the ratio of debt payments vs income. If your debt ratio is higher than 44% it’s reasonable to assume you are feeling stressed.
Say the interest accumulating on your credit card is running away from you and you’re having a hard time keeping up with payments, it might be time to consider a consolidation loan. This type of loan takes your existing individual debts and compiles them into one lower interest term loan. This makes your interest paid a lot lower and payments more manageable, because it’s all in one place.
If your debt is so large that a consolidation loan isn’t possible then there are two options that sound scary, and certainly have consequences, but may be a way for you to reset.
The benefit of a consumer proposal is that you won’t be prevented from applying for credit products in the future, however, it will negatively impact your credit score, and is not a decision to be taken lightly. It will show up on your bureau and will state the status of “paid,” “settled,” or “closed.”