Avoid These Mistakes When Paying Down Debt

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Avoid These Mistakes When Paying Down Debt

Written by Corrina Murdoch
Fact-checked by Caitlin Wood

Updated August 24, 2021

Avoid These Mistakes When Paying Down Debt

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Debt Debt Relief Debt Repayment Lookout

In today’s society, debt is more than common — it’s expected. Now, while some debt can be healthy, like routinely paid student loans, a mortgage, or sometimes a car loan, debt is notorious for snowballing. Ultimately, all debt needs to be paid off. Everyone takes a different approach to debt management, and some are more responsible than others. 

If you don’t have a plan, it can take years and be extremely expensive to pay off your debt. Even seemingly small financial errors can result in damage to your credit score, not to mention worse risks like bankruptcy. To avoid this, it’s important to handle your finances prudently and to avoid common pitfalls associated with debt management and repayment. 

Find out how a credit counselling agency can help you.

Avoid These Mistakes When Paying Down Debt

Managing your money properly means knowing what to avoid, and this is even more important when it comes to debt. Even one misstep can result in costly consequences, so familiarize yourself with common pitfalls so you can sidestep gracefully.

Mistake 1: Using High-Interest Loans

Though cash flow issues cause a lot of stress, turning to these quick fixes sets you on a risky path. These loans are well-advertised, with flashy signs for payday loans on every corner. From credit card cash advances to car title loans, getting cash quick isn’t the problem — it’s what comes after. The loans are easy to get but they also come with exorbitant interest rates, not to mention the high fees and penalties written into the agreements. 

  • Financial Risks: The risks of high-interest loans are extreme. You can lose your vehicle for defaulting on a title loan; and, since these loans are often structured to force you into a vicious cycle of debt, it’s a problem countless consumers have encountered. 
  • Solution: Even if you have bad credit, there are a number of alternative personal loan lenders with much lower rates and fees than payday lenders. Moreover, you can use loan comparison websites like Loans Canada to apply with multiple lenders with a single application. This will allow you to review different lenders and choose a loan offer that works the best for you.

Mistake 2: Only Paying The Minimum Payments

Most Canadian consumers have credit cards, a form of revolving debt that can snowball (quickly). While it can sound enticing to pay only the minimum amount every month, it is a slippery slope that’s hard to navigate. Sure, paying the minimum on-time prevents default fees and your credit file from showing delinquent behaviour, but this habit has a dark underbelly that can lead to long-term financial issues. 

  • Financial Risks: Though you’re avoiding some issues, minimum payments means you aren’t paying off the bulk of your balance. It results in your account incurring more interest and ultimately increases the amount of debt in your name (something that also impacts your credit score). 
  • Solution: The alternative is paying a fixed amount each month. For instance, consider a situation where you owe $5,000 on a credit card with 19.99% interest. If your minimum payment is 5% (roughly $250 per month), it would take ten years to pay off the debt. During that time, you would pay $2,443.49 in interest. Conversely, you could pay a fixed amount of $350 per month and it would take just 17 months to repay. Plus, you would only pay $758.33 in interest (less than half the amount you’d pay with minimum payments). 

Learn more about the consequences of making partial payments.

Mistake 3: Relying On Debt Settlement Companies

Though it can sound appealing (and for many, it is a suitable option), debt settlement comes with its own set of risks. On the plus side, it can eliminate issues with late fees and potentially reduce your debt by half or more. It is also a way to halt any negative impact on your credit score

  • Financial Risks: However, it’s important to understand that a debt settlement company cannot guarantee success. In fact, it can leave you in a worse financial position than you were before as many advise you stoping making payments in order for them to better negotiate with your creditors. However, if the deal falls through, your interest and fees would have accumulated during that time, leaving you worse for wear. Moreover, many debt settlement companies charge hefty fees of their own regardless if they were able to successfully settle your debt. This can leave you further in debt.
  • Solution: If you find yourself unable to keep up with your debt payments, speak to a credit counsellor, they are a free service that can help you assess your finances and debt to help you find the best debt relief soultion for your situation.

Consider a debt consolidation loan or a debt management program instead.

Mistake 4: Using Your Home’s Equity

It might sound straightforward: your home is an asset, so why not use the equity? But choosing to liquidate your equity has some serious downsides, especially over the long term. 

  • Financial Risks: Tying bad debt to your home equity increases the risk of losing your home substantially. While there are risks associated with defaulting on your payments, few things are as risky as gambling your home equity. Unless you know that you absolutely can pay off the amount in a timely manner, this is something to avoid. 
  • Solution: If you’re looking to consolidate your debt, choose a personal loan over a home equity loan as you won’t be risking any of your assests. If you need additional help, speak to a credit counsellor to find a debt relief soultion that works best for you.

Mistake 4: Using Credit Card Balance Transfers 

Like most financial maneuvers, this approach isn’t suitable for every situation. This is when you transfer the balance of your existing card to a new card with an interest rate promotion.  It can be a suitable approach if you are certain that you can pay off the debt before the promotion ends. It also can work if the interest rate after the introductory offer is lower or equal to your existing rate of interest. 

  • Financial Risks: If you aren’t able to pay off your principal balance before the end of the trial period, you can be left with a rate higher than you would pay otherwise. Also, if you spend money on the new card, you can lose the upper hand quickly. Many cards come with balance transfer fees, so be sure to calculate what you will pay in fees versus what you stand to save.
  • Solution: Before opting for a credit card balance transfer, always ensure that it is worth the effort and that you can actually save money. If not, it may be better to consolidate your debt with a personal loan.

Are Your Having Trouble Managing Your Debt?

Though there are some risky ways to pay off your debt, it is possible to generate a good plan, whatever your circumstances may be. The key is to plan ahead. Even if it’s tentative, sketch out a budget and update it regularly. As the adage goes, slow and steady wins the race, though there are some things you can do to accelerate the race against debt:

  • Pay your most expensive debt first. Identify the loans with the highest interest rates and prioritize those payments whenever you have extra money to put toward debt repayment. This lets you keep up with minimum payments on other cards while reducing your overall debt load faster. 
  • Aim to pay more than the minimum amount. Issuing a payment over the minimum requirement means that you pay less interest. This reduces the time it will take you to pay off your debt and the amount you pay overall. 
  • Make a budget and stick to it. Gain a full understanding of your income and your spending. By knowing how much you have available to spend, you can avoid adding to your credit card balances. It also tells you how much extra you have to apply to your existing debt. 
  • Consult a professional debt specialist. If you are still struggling with your finances despite your best efforts, reach out for help. Debt specialists are trained to evaluate finances and curate a personal debt-management solution to your needs.

Final Thoughts

Instead of letting debt snowball through inaction, there is always something you can do. By avoiding the worst approaches to debt repayment, you can focus on financially healthy decisions. Take an honest look at your debt and income and make a plan to tackle it so you can shore up a better financial landscape in the future. 


Rating of 5/5 based on 2 votes.

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

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