Sudden debt happens to the best of us. Whether it’s a holiday hangover or covering an emergency purchase, it’s not uncommon to find yourself with a bit more debt than you might have been planning for.
While a little bit of ongoing debt can be expected, especially if it’s a mortgage or student loan, other types of high-interest consumer debt should be taken care of as soon as you can. With the average credit card interest rate in Canada at 19% (and some as high as 29.99%) you want to plan to get back on your financial track ASAP.
Cut yourself some slack
In 2020, as the COVID-19 pandemic kicked in and then completely upended our finances and the way we live, Canadians relied on their credit to get by. It’s very possible that you had legit reasons to dip into credit to survive. Beating yourself up over whether it was the right or wrong thing to do won’t help you to feel more in control — in fact, it will probably make it harder.
Accept that what’s done is done. We have all been living in extraordinary circumstances and you might have had to make some equally unordinary decisions to make it through, including financially. Try to let go of any shame you feel, give yourself some self-compassion for doing your best, and congratulate yourself on taking steps to pay off your unexpected debt and build a more stable foundation for the future. You got this.
Ask your lenders for help (and ye might receive)
During COVID-19, major Canadian banks have been offering debt relief and other financial assistance programs. They might let you defer payments interest-free or set up other payment plans that will make it easier to repay debt. But it won’t happen if you don’t ask.
Your interest rates are negotiable, especially if you have a solid payment history. Sure, talking to your bank on the phone ranks somewhere around getting a root canal on the scale of “how much do I want to do this right now?” but you might be pleasantly surprised at how they can help you. Once you’ve talked to them, you’ll have a very firm idea of how much interest you’ll be paying and that will give you the basis to make informed decisions on how to pay off your remaining debt.
Temporarily cut back on saving and investing
The keyword here is “temporarily”. Building an emergency fund and adding to your long-term investment accounts, like TFSAs and RRSPs, are cornerstones of your financial security. Under most circumstances, maintaining your savings and investing accounts should be your priority – except when you’re carrying high-interest consumer debt. Just paying off the minimum on your credit cards means that the magic of compound interest (which works for you in your investments) is now working against you.
The longer you maintain a balance, the more you’ll end up paying in interest. Simple as that. And the more money you pay in interest, the less money you’ll have to invest. The sooner you can get back to adding cash to your investments, the more time you’ll have to reap the benefits of long-term compound interest. If you can reduce your saving and investing for a few months to completely pay off your credit card or consumer debt, that is a smart and worthwhile approach for your long-term financial health. Just be sure to switch back to your regular investing payments as soon as you can.
If you have strong credit and are dealing with debt across multiple accounts, then consolidating your debt into one lower-rate personal loan could save you interest fees, time, and worry. Most major banks offer consolidation loans or low-interest transfer credit cards specifically for this reason.
This takes discipline and shouldn’t be entered into lightly. You might have to pay a fee — a small percentage of your total consolidation amount — to make the move. You’ll definitely have to avoid making new charges on the other accounts once you’ve consolidated, but if you trust your own ability to stick it out and maintain your consolidation wisely until it’s paid off it can be a fast and relatively pain-free way to get back in the black.
Decide what motivates you and plan for it
If we remove our emotional reactions to paying off debt, then it makes mathematical sense to pay off your highest-interest debt first. But – and this isn’t really a surprise - we’re human and that means our reactions to our finances and debt are understandably emotional.
Make a list of all of your debts, their interest rates, and their total amounts. While you don’t want to necessarily pay off the smallest amount first while leaving big high-interest amounts to continue to grow, paying off a small amount completely can give you a motivational boost. It’s one thing off your financial checklist you don’t have to think about first.
As you look at your list, decide for yourself if you’ll be more motivated by getting rid of some smaller amounts or by tackling the bigger (and scarier) amounts day by day and know that — even though it might not feel like it — you’re benefiting yourself more in the financial long-run. Remember that any action to remove debt is better than being frozen into inaction. Give yourself a pat on the back for making a list, choosing which course you’re going to take, and then following it.
Redeem points against your balance
In the before times, especially with travel rewards credit cards, it was fun to rack up points and think about planning your next vacation. Right now, if you’re carrying any high-interest debt, it makes more sense to use your points to pay off your balance than to save them up for travel or other rewards that you’ll use “some time.”
Sure, this can feel like a tough pill to swallow. Travel will come back into our lives at some point. Trading in your points now to pay off your debt will help you be in better financial shape to take advantage of travelling again when you’re able to.
Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.
Jeremy Elder is a paid Sonnet spokesperson.