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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. 

How To Avoid Debt In Canada 

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. Here are some mistakes you should be aware of to avoid being in debt: 

1. How To Avoid Debt: Limit High-Interest Loans Use

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.

2. How To Avoid Debt: Pay More Than 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 mean 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.

3. How To Avoid Debt: Be Wary Of 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. 

Financial Risks: 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 to stop 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 non-profit credit counsellor, they are a free service that can help you assess your finances and debt to help you find the best debt relief solution for your situation.

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

4. How To Avoid Debt: Don’t Use Your Home’s Equity Unless You Can Afford It

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

Financial Risks: Tapping into 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 assets. If you need additional help, speak to a credit counsellor to find a debt relief solution that works best for you.

5. How To Avoid Debt: Watch Out For The Credit Card Balance Transfer Promotional Period

Like most financial maneuvers, a credit card balance transfer 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.

Tips To Better Manage Your Debt

Though there are some risky ways to pay off your debt, it is possible to generate a good plan, whatever your circumstances. 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. 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. And, if you’re struggling with high levels of consumer debt, it’s important to speak with a debt relief specialist. 

How To Avoid Debt FAQs

Is all debt bad debt?

Debt becomes bad when it’s unmanageable and does not add anything positive to your life. Bad debt is consumer debt, high-interest credit card debt, payday loan debt, and even a car loan with a high-interest rate. While most people consider a mortgage to be good debt.

What is the 50-30-20 rule?

The 50-30-20 rule is a budgeting strategy. With this method of budgeting, 50% of your income goes toward needs, 30% toward wants, and 20% toward savings.

How much should I save every month?

There is no exact number to aim for when it comes to monthly savings. Instead most consumer aim for a percentage of their take-home pay. As a general rule, saving at least 20% is a good amount to aim for.

What is a credit card minimum payment?

Most credit cards have a minimum payment that must be paid each month. Not to be confused with your balance. A minimum payment is usually $10 or a set percentage of your balance, whichever is higher.
Corrina Murdoch avatar on Loans Canada
Corrina Murdoch

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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