High-Interest Debt: Tips On How To Get Out Of Debt In Canada

Canadians are carrying an average of $21,859 in non-mortgage consumer debt, according to Equifax. It can be challenging to stay afloat amid the relentless surge of bills, credit card payments, and rent payments, but it doesn’t have to be that way. Regardless of how you got into debt, with a little work and changes to your spending habits, anyone can work towards becoming debt-free. 

Read on to discover simple ways to help yourself get out of debt.

How To Get Out Of Debt In Canada – Key Points

• Getting out of debt may involve restructuring your current payment plan, using a balance transfer credit card, or consolidating your debt.
• To control your debt before it gets out of hand, track your spending, create a budget, and make more than your minimum payments.
• If your debt is out of control, you may need to consider more severe debt relief options, like debt settlement, consumer proposal, or bankruptcy.

What Is High-Interest Consumer Debt?

Consumer debt is defined as a debt resulting from borrowing funds to cover the purchase of goods and services for personal use. 

It often comes with high interest because people use credit cards to fund their purchases. Most credit cards have an interest rate of 17.99% or more, hence the term high-interest.

High-interest consumer debt is sometimes a result of an emergency, unexpected expenses, or bad spending habits. Since the cost to service high-interest debt can be quite costly, it should be avoided whenever possible.

If you find yourself carrying a growing amount of high-interest debt, make it a priority to pay it down.

Best Ways To Get Out Of Debt In Canada

Carrying a significant amount of high-interest debt can be challenging to overcome, especially if the interest portion continues to accumulate. In this case, you may find yourself making minimum payments more often than not. This can cause your outstanding principal debt to increase, as much of your payments go toward covering interest.

If you’re constantly relying on your credit cards, you may need to review your finances. Fortunately, there are a few effective ways to get out of debt.

1. Speak To Your Creditor

If you know you’re going to miss a payment, contact your creditors, don’t hide from them. Be honest with them and explain why you are having trouble making your payments. 

Some creditors might be willing to work with you and modify your payment plan or defer a payment as long as you make an honest effort to pay.

2. Restructure Your Debt

Depending on the type of debt you’re carrying, such as credit card debt, you may be paying a lot more interest than necessary. In this case, restructuring your debt can reduce your interest payments, which can help save you money and use it to put toward paying down your debt.

Here are a few ways you can have your debt restructured: 

Use A Debt Consolidation Loan 

If you have several loans or credit cards, particularly those with high interest, you can pay them all down with a debt consolidation loan. 

By doing so, you’ll be left with one bill payment instead of many, which will make bill management much easier. Further, you can save a ton of money in interest by swapping your high-interest debt for a single lower-rate debt consolidation loan. That said, this is still a loan, so if you’re not diligent with payments, you could end up owing even more.

Roll Your Debt Into Your Mortgage

If you own a house and have accumulated at least 20% in equity, you may qualify for a cash-out refinance. With this option, you can refinance your home for more than what you owe. The extra amount can be “cashed out” and used to pay off and consolidate your debts.

Since your home equity secures the financing, you may qualify for a lower interest rate compared to your existing debt.  

Enter A Debt Management Program (DMP)

A debt management program involves working with a credit counsellor, who will negotiate a new payment plan with your creditors. Essentially, it combines all your 

unsecured debt into one easy-to-manage monthly payment over a period of up to 5 years. During that period, interest charges and fees will be halted or even eliminated. 

Once you have enrolled in a debt management program, you will send money to your counsellor, and they will pay creditors on your behalf. 

3. Use A Credit Card Balance Transfer 

A balance transfer credit card offers low or no interest on the outstanding balance for a specific amount of time. If you’re currently carrying a high balance on a credit card, you can transfer that balance to a low- or no-interest balance transfer credit card. Then, you can pay down your balance without accumulating interest, as long as you repay the balance before the promotional period expires.

Learn more: How To Do A Balance Transfer With A Credit Card

Is There A Way To Pay Off My Debt Quickly?

Drowning in debt shouldn’t last forever. There are smart ways to speed up your debt repayment and take back control of your finances: 

Pay More Than The Minimum Payment

Making the minimum payment on your credit card can ensure that you don’t miss the payment due date without having to cover the full statement balance. While this may be a handy feature when money is tight, you’re just accumulating more debt this way. This is because the interest charges continue to accrue, and can accumulate faster than you can pay your debt. 

Try your best to cover the full credit card balance each month. At the very least, cover a larger percentage of your balance well above the minimum amount to keep interest accumulation to a minimum. The larger the payments you make, the quicker you’ll reduce what you owe and how much interest you’re accumulating.

Use The Avalanche Or Snowball Method

Both the avalanche and snowball methods are popular strategies used by consumers to pay down their debt:

• Avalanche Method: The avalanche method involves focusing on paying off the highest-interest balance first while making minimum payments on the rest. This helps you save more money on interest and pay off debt faster over time.
• Snowball Method: The snowball method involves has you paying off your smallest debt first while making minimum payments on the rest. Once you’ve paid off the first balance, you roll that freed-up payment into the next-smallest debt. The idea here is to build momentum, which can keep you motivated to keep repaying your debt.

Learn more: How To Pay Off Debt Faster

Tips And Strategies To Help Manage And Pay Down Debt

Having a certain amount of debt is normal and may even be a good thing for your credit profile. But it’s important to keep your debt in check. Here are some tips to help you do just that. 

Track Your Spending

It’s hard to get where you want to go if you don’t know how you’re currently doing. That is why the first thing you need to do is start tracking how and where you spend your money to help you build a realistic budget. Having a budget helps you reach your savings goals, spot bad spending habits, and ultimately leads to financial health.

One common and effective method is the 50/30/20 rule, which works by dividing your expenses into the following categories: 

• 50% Must-Haves – Expenses in this category include essentials such as rent, utilities, and other non-negotiables.
• 30% Wants – These expenses include non-essential costs such as nights out, trips, and other things you may want but don’t need.
• 20% Debts – This portion of your income should be dedicated to paying down your debts.

This is just a suggestion. In some high cost of living cities, you may spend more than 50% on your must-haves due to high rental demands.

Budgeting can be cumbersome, especially when you have to cut out unnecessary expenses that you’ll miss. But, a budget is a plan for your finances and future. Eliminate your wants and take a second look to see if you can find cheaper alternatives. 

Learn more: What Is The 50/30/20 Rule For Budgeting?

Use Coupons And Discount Codes

Using coupons and discount codes is an effective strategy to steadily reduce your debt. While you’re not directly paying down your debt this way, you’re freeing up more money that can be used towards debt repayment.

Here are a few sources to look into to find discounts, coupons, and freebies, based on your situation:

Downgrade Your Car

Besides mortgages, car loans are one of the biggest sources of debt. People tend to purchase cars that are outside their price range and end up paying hundreds of dollars every month. 

By trading in your car for something more affordable, you will not only reduce expensive monthly payments, but you can potentially get some money back to help pay down your debt. 

Can You Have Your High-Interest Debt Forgiven?

Yes, high-interest debt can sometimes be forgiven through various programs, depending on your financial situation. Just keep in mind that while these options may reduce or eliminate what you owe, they can severely affect your credit score.

What Is Debt Forgiveness?

Debt forgiveness involves working with creditors to have your debt either partially or completely eliminated. While Canada doesn’t have a formal government-backed debt forgiveness program, there are a few legally binding options available. 

If you’re looking for assistance in managing or reducing your debt, you might want to consider options like a debt management plan, debt settlement, consumer proposal, or even bankruptcy.

Debt Settlement

Debt settlement typically involves negotiating with your creditors to accept a lump-sum payment that’s less than the full amount you owe. This reduced payment is often a fraction of your original debt. Creditors may be open to this option if you’ve already missed several payments and show that you are financially unable to pay the whole amount or keep up with payments. 

The idea is that creditors want to receive some form of payment now, rather than nothing or having to wait. Keep in mind that debt settlement will affect your credit score and remain on your credit report for 7 years. 

Consumer Proposal

With a consumer proposal, you’ll be working with a Licensed Insolvency Trustee (LIT) who will create a legally binding debt repayment proposal between you and your creditors. A consumer proposal usually forgives a significant portion of your debt, leaving you with a small amount to pay back over a period of up to 5 years. 

In addition, a stay of proceedings will be filed on your behalf, this means that lenders are required to stop contacting you to collect. That said, a consumer proposal is an extreme option that can have long-lasting effects on your credit score. Be sure to seriously consider if this option is right for you before moving forward.

Bankruptcy

With this option, you’ll be absolved of all your debts, except for a few exceptions such as spousal payments or legal fines. As with a consumer proposal, you will be working with an LIT who will create an agreement freeing you from debt, including a stay of proceedings. You may also lose possession of some of your assets, though there are exemptions. 

It’s important to note that filing for bankruptcy should be a last resort, as it is a drastic choice that has adverse, long-term effects on your credit.

Additional Reading

What Happens To Your Debt When You Die?

How To Settle Debt In Canada On Your Own

How To Get Out Of Debt On A Low Income

Bottom Line

It can seem like a daunting task to get out of debt, but it can be done. In the process, you will develop healthy spending habits that will serve you for a lifetime. But if you’re struggling to manage your finances and debt on your own, speak to a credit counselling professional. They have several debt relief options available to assist you. 

High Interest Loans FAQs