Debt management How to pay off your debts

Credit cards, lines of credit, loans… there’s no shortage of credit options. But credit can also mean debt. Want to clear your debt? Here’s a five-step plan to help you achieve your goal.

1. Identify your debts and draw up your balance sheet

To establish your game plan, the first thing to do is identify your debts. To do this, you create a list that includes: 

• the total amount of your debts
• the interest rate that applies to each of them

We also recommend taking the time to prepare your financial statement. This overview of your personal finances, which includes your assets and liabilities, gives you an overview of your situation and your debt level. With this statement in hand, you’ll be able to make informed decisions about the best course of action.

2. Restructure and negotiate your debts

Restructuring your debts essentially involves consolidating them to improve your financial situation and reduce the interest you pay each month.  What is consolidation? It’s the principle of grouping all your debts into a single loan at a more advantageous rate when possible. For example, if you have a credit card balance with a high interest rate, consolidating it means paying it off with a loan with a lower interest rate. This allows you to save on the interest you pay on that balance. This option may be offered by your financial institution under certain conditions. An acceptable credit report and reasonable income are two of these conditions.  

Renegotiate your debts

 Good news! Some debts can be renegotiated. Don’t hesitate to contact the people or institutions from whom you borrowed money to ask them to review certain parameters of your debt.  Credit companies and financial institutions are sometimes willing to offer better terms to ensure repayment. For example, they might extend the due date and reduce your monthly payments, which would help you avoid penalties and late payments that could damage your credit report. Do you have tax debts? It’s also possible to negotiate terms with the tax authorities. Please note: If you have several late payments, you should contact your financial institution’s collection department. They can help you restructure your debts and possibly make arrangements to bring you up to date on your repayments.  

Last resort solutions

Sometimes, debt levels can seem insurmountable. In these cases, there are more radical solutions, including consumer proposals and personal bankruptcy . In some situations, this may be the only option to regain financial stability. But before choosing this solution, which can help you free yourself from certain debts, you should know that it will remain on your credit report for at least six years.

3. Review your budget

Once you’ve listed your debts, you need to determine how much you can afford to pay them off. To do this, you’ll first need to create a budget or review your existing one.

The 50-30-20 rule

The 50-30-20 rule is a good way to free up money to pay off your debts. It involves dividing your paycheck as follows:

50% for your basic needs – rent or mortgage, utility and telecom bills, groceries, etc.

30% for your non-essential expenses – little pleasures like restaurants and outings, gifts and treats. 

20% towards debt repayment – ​​spend this amount on your debts using the repayment method of your choice.

Need help creating your budget? Check out our article on the subject . There are also online tools like the federal government’s budget calculator or our budget calculator that can help you with your calculations.

Should you continue saving while paying off debt?

The answer is yes! It’s recommended that you dedicate a portion of your income to savings, even if you have to reduce the amount you allocate to it. In other words, save less, but keep saving.  

Here are three good reasons to keep saving

Save taxes: Depositing money into an RRSP or TFSA reduces your tax bill and allows you to get a tax refund that you can even use to pay off your debts. That way, you kill two birds with one stone! Avoid future deb.t Saving to build an emergency fund that you can draw on in case of unexpected expenses keeps you from going into debt. Secure your future. Putting money aside regularly, even a small amount, can help you achieve a project or ensure a more comfortable retirement. Despite your debts, you must continue to think long-term.

4. Determine your repayment method

The High Interest Method

It involves prioritizing the repayment of debts with the highest interest rate. It helps you decide between two debts of the same amount that have different interest rates. Typically, credit cards have the highest interest rates, while student loans offer the lowest rates. This method will allow you to optimally repay your debts and reduce interest costs.

The snowball method

It involves paying off your smallest debt first and then working your way up. This method is psychologically beneficial. By doing this, you’ll be able to pay off a debt quickly and feel like you’re making progress, which is good for your motivation. However, note that this method could cost more in interest. 

Other considerations to keep in mind

No matter which method you choose, the following two essential elements should also guide your choices Mandatory payments – even if you prioritize paying off one debt over another, make sure you continue to make the mandatory minimum payments on all your debts. The maturity of a debt – if a debt has a specific maturity date, don’t forget to factor it into your repayment plan.

5. Rebuild your credit and maintain a good credit score

Accumulating debt, and late payments in particular, have a significant impact on your credit report. As a result, your credit score could suffer. Don’t panic, it’s possible to remedy this situation. Here are our tips for rebuilding your credit and maintaining a good credit score in the future.