If you got carried away with your holiday shopping this year, you’re not alone. Here’s what you can do about it.
- Pay at least the minimum you owe each month on your credit cards. If you have any extra cash after that, some experts advise you to pay down more on the card with the highest interest rate first. As you pay off each card, start paying more on the next debt in line.
- Ask for better terms from your credit card company – such as a lower interest rate. If the first person you talk to can’t help you, ask to speak to their supervisor. If you have a good record of paying on time, they may be able to help you get through a short-term crunch. To compare credit card rates and costs, visit Industry Canada’s Cost of Borrowing Calculator. Tip: Consider getting a new card if it offers a special low interest rate when you sign up. For example, you may get a lower rate for six months if you transfer over the balances you have on your other cards. Just don’t start racking up new charges on the card.
- Lock up your credit cards until you’re out of debt. Don’t cancel them, but do put them away in your safe deposit box or a drawer. Find another way to pay for your purchases.
- Reduce your interest charges by grouping all your debts into one low-interest loan. Just be sure to stick to reputable financial institutions. You don’t want to refinance with a company that will surprise you with hidden fees or higher interest rates down the road. Tip: Be careful about using a home-equity loan or line of credit. The interest rate may be lower, but you could lose your house if you don’t make the payments. The other danger is that you’ll get the loan to pay off your credit cards and then start to rack up new charges. If this happens, you’ll soon find yourself in even deeper trouble.
- Look for ways to bring in more money. Some people work extra weekends or part-time hours until they pay off their debts. Or you may be able to start your own business on the side while you do your regular job.
- Buy only what you need. Cut back on things like eating out and other optional purchases. This will free up more cash to pay down on your debt. So what counts as optional? You can likely live without a new pair of pants or fancy prepared foods. You may even be able to put off a costly car repair.
- Find hidden sources of money. If you have a second car or costly toys – like electronics or sports equipment – consider selling them. Or, you could sell the car you have and buy a cheaper one – as long as you’re not setting yourself up for huge repair bills. Tip: Some people get extra money by selling smaller items for cash on online auction websites. Check your closets and cupboards and see if you have anything of value that you no longer need.
- Create a budget and stick to it. It sounds daunting, but keeping a budget doesn't have to be a lot of work. If you're comfortable with computers, you can use a spreadsheet to make tracking your income and expenses easier. Keep it simple, be honest about recording everything you spend, and reward yourself when your budget works out. Learn more
- Call a financial planner or a credit counsellor for advice. Non-profit credit agencies work to help people with their financial situations. They can help you develop a plan, reduce your interest costs and get out of debt over time. Learn more from Credit Canada.
- File for bankruptcy only as a last resort. There are times when repayment may be impossible. In those cases, bankruptcy may be the only way out. But there are some drawbacks. For example, your credit record will contain this information for six years or more. So before you take this step, be sure to get some expert advice. Learn more from the Office of the Superintendent of Bankruptcy Canada.
If you’re in debt, don’t forget that paying it off can be a very emotional process. It can even be overwhelming. Many people even stop opening their monthly bills just to avoid the “bad news.”
But debt piles up quickly unless you tackle the problem head-on. For more ideas, read Seven ways to get out of debt.
Planning to pay only the minimum on your credit cards? Think again. Let’s say you owe $4,000 on your credit cards. The interest rate is 18 percent. If you pay a minimum 2 percent payment each month — or $80 — it will take you more than seven years to get out of debt. And, you will end up spending close to $7,500. That’s nearly double what you spent in the first place.
If you pay just 1 percent more than the minimum payment — $120 a month, in this case — you'll be out of debt in about half the time (47 months). Even better, you'll end up spending just $5,640 to clear your debt. Calculate your payments now
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.