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Managing your debt can certainly be a difficult task. While it might be simple enough at first to deal with a handful of common credit card or personal loan debt, it can quickly get out of hand, especially when you aren’t making your payments on time and/or in full. That’s why it’s important to learn a little bit about some of the more popular debt management techniques available to all credit users. And, trust us, it’s better to learn about them now rather than later.

Basic Debt Management Tips

If your debt hasn’t gotten so out of hand that you need to consider more drastic measures, you can always start your debt tackling plan with these simple steps:

  • Make more than your minimum payment every month.
  • Do not miss any payments.
  • Track your spending so you don’t spend more than you earn.
  • Don’t apply for too many credit cards.
  • Always negotiate for the lowest interest rates.
  • Use cash more than cards whenever possible.
  • Create a budget to avoid any potential debt problems.
  • Start an emergency fund.
  • Set up automatic transfers to your savings account.
  • Eliminate costly agreements or activities that are difficult to maintain financially.

Tips for Getting Out of Debt Once You’re In Too Deep

Your debt load might already be too heavy to manage. In that case, here are a few things you can try to get yourself out of it:

  • Once again, if possible, pay more than the minimum!
  • Decrease your regular expenses as much as possible. Remember, you’re on a tight budget. Free yourself from any unnecessary costs.
  • Avoid eating out at restaurants. Save on groceries by buying more non-perishable items, like canned foods, cereal, and frozen foods. Pile up on food that’s on sale and try to go grocery shopping one less time each month than you normally would.
  • Buy used products when possible (cars, computers, etc.)
  • If you have multiple cars in your driveway, sell the more expensive, less fuel efficient ones and become a one car household.
  • Use public transportation to save money on gas.
  • Pay with cash, not credit. You’re likely to spend less when paying with cash. Hide your credit cards if you have no control!
  • Prioritize your debts – choose either the most costly or least costly debts and work your way up. If you need to see progress to get encouraged, start by paying the small balances first. Once this is done, you will feel a sense of accomplishment, which should motivate you to pay off your other debts. Contrarily, if you are ready to dive into an intense budget program, you can begin by paying your most expensive debts first.
  • After the most costly, nerve-racking debts are paid off, continue down the list, paying the next most expensive one until you are debt-free. Choose whichever payment method works best for you.
  • Consider working a second job or increase your hours/shifts until your debts are paid off.
  • Consider renting out a room or the basement of your home to generate some extra income. Websites like “Airbnb” make this very easy to do.
  • After you’ve done a thorough analysis of your income, assets, and expenses, as well as create a proper budget, you should proceed by calling your creditors to negotiate a lower interest rate or more reasonable payment schedule for all your credit products.
  • Consider applying for a debt consolidation loan. This is when you combine your debts into a single, more favorable loan. Your debt consolidation loan might actually come with a lower interest rate, cheaper monthly payments, and/or an extended payment schedule.
  • Refinance your mortgage. If you own your home, you may have enough equity to consolidate all of your debts into your mortgage. If you don’t have much equity in your home, additional mortgage insurance costs may be expensive. Make sure you consider all your options and seek advice from someone other than your lender.
  • Speak to a professional credit counselor for free!
  • Host a garage sale! Declutter your home and sell any unused items.

Dealing With Debt Collectors and Collection Agencies

Collection agencies are hired to pursue individuals who have stopped making payments on their debts. These agencies may work for credit and loan companies. They try to collect either a percentage of the debt owed or, if possible, the full amount. There are also independent collection agencies who charge fees to collect debts, or buy the debt outright and try to collect it for themselves.

Here’s what’s likely to happen when your debt is handed over to a collection agency:

  • You will be notified in writing when your file has been given to a debt collector.
  • Once you’ve been notified, the debt collector is now allowed to start calling you.
  • Afterward, you can either pay back what you owe or try to negotiate with your debt collector.
  • If you are unable to pay, you may have legal action taken against you.
  • During this legal action, a judge will likely sign a Judgement legally forcing you to pay back your debts.
  • Once a Judgement has been placed on your debts, your debt collector can start garnishing your wages.
  • The only way to stop this is by filing a consumer proposal or bankruptcy.

Being Treated Unfairly By a Collection Agency

In Canada, there are regulations and laws that all collection agencies and debt collectors must follow. While some of these laws differ from province to province, here are some of the illegal proceedings you should look out for:

  • A debt collector must always notify you in writing before they can try to collect any debt or start any legal action.
  • It is to illegal for a debt collector to contact anyone but you for information regarding your debt. On the other hand, they may contact your friends, relatives or your employer for general information, such as your phone number.
  • It is illegal for a debt collector to use any form of abusive language.
  • Providing misleading information or disclosing information that may cause prejudice is also illegal.
  • A debt collector must always identify themselves, the company they work for and how much debt you owe before attempting to communicate with you.
  • If you claim that you don’t owe them any money, debt collectors must provide you with proof that you do in fact owe the money.

Click here to find out how you can stop collection harassment in Canada.

What is a Total Debt Service Ratio?

Total Debt Service Ratio (TDS) is a guideline that lenders use to evaluate your debt commitments compared to your income. Simply put, how much you owe in perspective to how much you make. This ratio is generally used to evaluate whether or not you can handle mortgage payments on top of your other debt obligations.

It displays the amount of cash flow that’s available in your pocket to pay all of your current debt contracts. The ratio is calculated using the formula below.

Having a ratio of anything less than 40% implies the borrower has an acceptable and standard level of debt.

What is a Debt-to-Income Ratio?

Your debt-to-income ratio (DTI) compares your monthly recurring expenses with your monthly income. This is one of the many ways lenders evaluate whether or not you’re capable of repaying debts consistently. It’s calculated using the following formula:

DTI= Total recurring monthly debts / Gross monthly income

It’s in your best interest to have a low DTI, as it implies a good balance between debt and income and shows that you are a responsible borrower. You should aim for a DTI that is around 36% (lower if possible). If you have a DTI that is higher than 43%, you will have more difficulty getting approved for new loans and credit.

What is a Credit Utilization Ratio?

Your credit utilization ratio compares the amount of available credit you have to the amount you’re actually using. This ratio is specific to your credit usage. Let’s say you have a combined credit limit of $7,000 and your total balance (the amount you’ve used) is $4,000. Here’s how you can easily calculate your credit utilization ratio:

4000/7000= 0.57

This means that you have a credit utilization ratio of 57%, significantly above the recommended 30%. A credit utilization ratio higher than 30% will negatively impact your credit score and cause it to decrease, especially if it constantly stays too high.

Can’t figure out why your credit score dropped? Try reading this.

Good Debt VS. Bad Debt

So far, we’ve explained how using credit responsibly is important if you want to qualify for the majority of credit products. Thus, the right amount of debt is not only required but also encouraged to a certain extent. In our next section, we’ll explain the difference between good and bad debt, as well as some ways of managing both types.

Good Debt

Some debt can be valuable and advantageous under certain conditions. Debts from purchasing certain objects and property that will increase your earning power are considered good debt. Good debt comes when credit is used in such a way that will benefit your future and generate long-term income. For instance, buying a house will put you in debt, but will also increase your overall earnings, because you can sell it and possibly make a profit.

More examples include educational expenses, small business ownership, real estate (property), and any long-term investments like stocks or bonds. In fact, if you’re handling your debt responsibly, meaning you’re making all your payments on time and in full, your credit score will increase, giving you a healthy credit report, credit rating, and credit history. In doing so, you’ll raise your creditworthiness, making it easier for you to be approved later on in life.

Want to learn how you can get a free annual copy of your credit report? Click here.

Bad Debt

Generally speaking, consumer debt refers to credit card debt, as well as all other debt that will not generate any future value. This type of debt can be described as bad, although not all consumer debt is ultimately undesirable. Unfortunately, there is no exact definition of bad debt, as everyone’s financial needs are different. When we discuss bad debt, we mean any type of debt that is holding you back or creating financial issues for you. This is often consumer debt.

Looking For Even More Help?

Loans Canada can help you match you with the right debt relief product and the best provider for your unique needs. If you’re interested, start by filling out an application here.

Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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