Actually realistic, useful ways Canadians can decrease their debt
Nowadays, it may feel like you need to win the lottery in Canada to become debt-free.
If you’re struggling to pay off debt, you’re not alone. A recent report revealed a sharp increase in missed payments in Canada, indicating that people are having a very difficult time meeting their financial obligations.
Whether it’s student loans, mortgages, or credit card debt, many people in Canada are struggling to stay afloat.
Monisha Sharma, chief revenue officer at online personal loan provider Fig Financial, said that while debt is linked to a multitude of factors, the cost of living crisis is definitely fuelling it.
She stressed that we can’t blame it all on lattes or avocado toast.
“People have to pay more for the same things,” she told Daily Hive over the phone.”Collectively, Canadians are more in debt. It’s not a single decision, it’s just an unfortunate outcome of the times that we’re in.”
As a licensed insolvency trustee and senior vice president at MNP LTD., Linda Paul works closely with Canadians who are dealing with debt.
She agreed that the high cost of living is a significant challenge for Canadians.
“The high cost of living is driving people towards using credit to fill in the gaps,” she explained to Daily Hive. “A lot of folks just don’t have the wiggle room in their budget.”
Reducing the stigma surrounding debt is also crucial in encouraging people to take action.
“We all have debt, and so we need to take the stigma out of it and give people the tools to get out of debt instead of making people feel like it’s something they should hide or not talk about openly,” added Sharma.
Paul and Sharma shared their advice with Daily Hive on the best ways to tackle your debt and make it more manageable.
The main sources of debt in Canada right now
Grusho Anna/Shutterstock
Both experts cited mortgages and credit card debt as the primary sources of debt for Canadians at present.
Credit cards are an example of unsecured debt, which means they’re not backed by collateral. The lender can initiate collection action against you if you fail to repay, but they cannot have a legal claim to any of your property.
A mortgage is an example of secured debt, which means you agree to surrender ownership of an asset if you are unable to make monthly payments. In the case of a mortgage, this would be your house. In other cases, it may be a car that you’re financing.
“Over 80 per cent of Canadian household debt is linked to their mortgages, and as their mortgages are up for renewal, most Canadians are seeing an increase in the amount that they need to pay,” explained Sharma.
Paul added that debt also accumulates when there’s a loss or change in income.
“Sometimes that’s just job loss, or it’s related to medical reasons like illness,” she explained. “Sometimes there’s a reduction in household income because of marital breakdown, so we see that affecting people’s finances, as well.”
The best ways to pay down your mortgage
sasirin pamai/Shutterstock
Before buying a home and taking on a mortgage, Sharma advised Canadians to ensure the payments don’t exceed one-third of their take-home pay after taxes.
“That allows you enough room to have an emergency fund, it allows you enough room to invest in your future and obviously pay for your essentials on a day-to-day basis,” she said.
Paul said that mortgages usually allow homeowners to put down a lump sum annually, up to a certain maximum.
“If you’re able to put down lump sums here and there, like every year, if you’re able to save and do that, then you can pay it off sooner,” she explained.
The licensed insolvency trustee added that if you’re able to pay your mortgage weekly or bi-weekly, it will help pay it off sooner than a monthly payment and also lessen the interest.
When your mortgage is up for renewal, Paul said that’s the perfect time to chat with a mortgage broker and shop around for a better interest rate, rather than dealing with your bank.
The best ways to decrease your credit card debt
Pormezz/Shutterstock
Sharma said the reason why homeownership is a challenge for millennials and Gen Z is that they’re carrying a significant amount of credit card debt, which typically comes with high interest rates.
“You’re usually holding credit card debt, if you’re revolving, above 20 per cent Annual Percentage Rate, and as high as 30 per cent, so you’re paying a very high percentage of that minimum payment, which is really servicing this interest expense,” she explained.
Both Sharma and Paul highly advise Canadians to avoid making only minimum payments.
“You have to have an ability to make large payments to have it go down, to have the actual principal be touched by the payments that you’re making,” said Paul.
If you’re having a hard time getting the ball rolling with payments, Sharma suggested paying off smaller debts first, which can motivate you to tackle high-interest debt.
If your credit card debt has ballooned and you’re struggling to pay it off monthly, Paul advised getting a low-interest line of credit so that you can pay off the interest if you’re unable to make a full payment.
To get out of revolving debt, which allows consumers to repeatedly borrow up to a certain limit, Sharma suggested consolidating all of your debt and opting for fixed-payment debt.
A personal loan is an example of fixed-payment debt. You pay off all of your credit card debt with regular, unchanging payments over a set loan term. Sharma explained that you’ll be able to pay it off at a lower interest rate than your credit card, allowing you to manage your cash flow better.
“It’s a very regimented way for those who perhaps don’t have natural discipline because it’s a fixed amount that you have to pay on a monthly basis,” she said. “There is an interim by which you will already pay that off. So you know that there’s a path to get out of this debt.”
Fig Financial is an example of an online provider of personal loans; however, you can also obtain one from your bank.
Paul noted that she’s been seeing banks deny people personal loans because they’re being more conservative with their lending. She suspects that this is a result of financial loss during the COVID pandemic.
In this case, the licensed insolvency trustee suggested that Canadians file a consumer proposal, a legal process that allows for a new arrangement with creditors and requests partial forgiveness of debt.
“You’re essentially going, ‘Hey guys, I can’t pay you everything, but I’ll give you 20 cents on the dollar or 30 cents on the dollar,’ and then the creditors get to vote and decide on whether or not they agree to that new arrangement,” she explained.
Similar to a consolidation loan, people who opt for a consumer proposal will make payments over a fixed term, but they won’t have to pay the full amount of debt. Paul added that this option has a less significant impact on your credit rating compared to filing for bankruptcy.
You’ve decreased your debt — how do you maintain that?
Once you’ve paid off all of your debt, both Paul and Sharma stressed that it’s important to have a budget that you stick to.
“If you don’t monitor it and see if you’re actually following it every month, then you’re going to get into trouble. You’re going to overspend,” explained Paul.
Sharma advised sticking to the one-third rule, dividing your monthly income into three categories: daily living expenses, debt repayment, and savings or an emergency fund. Once you have your budget in control, she also suggested looking for ways to increase your income.
“Don’t spend what you don’t have. Often, especially young people, don’t realize that whatever they spend today is at the expense of their future self. You’re not setting your future self up for success,” said Sharma.