Finance fitness: How Canadians can overcome and manage credit card debt

Are you in over your head in credit card debt? Are you struggling to keep up with your monthly payments, frustrated with high interest payments, watching your credit score drop, and wondering if you’ll ever get ahead?

If so, this post is for you.

The first step to overcoming your debt is learning how to properly manage credit card debt. Below, I’ll share some helpful tips to help you get out of debt faster. Then, I’ll explain how to properly manage your credit cards so you don’t end up in over your head in the future.

4 tips to get out of credit card debt

In December 2022, Statistics Canada reported that consumer credit card debt grew by 13.8% on a year-over-year basis, reaching a record high of $91.5 billion.

Between disruptions caused by the recent pandemic, the rising costs of living, and inflation, many Canadians have had to rely on credit cards to help them through difficult situations and keep up with daily living expenses.

Everything borrowed must one day be repaid, though.

If your credit card debt seems like an impossible mountain to begin climbing, here are some tips that can help you pay off your credit cards faster so you can get your finances back on track.

1. Assess your total debt and spending habits

Start by laying out all your debts.

List every card, its balance, interest rate, and minimum payment.

This will help you understand the depth and shape of the hole you’re in so you can plot a way out. Unless you win the lottery or are the beneficiary of a large inheritance or insurance payout, you likely won’t be able to knock out all of your debt at once.

The best way to begin overcoming your credit card debt is to create a reliable, consistent repayment plan that will allow you to incrementally get out of debt while also balancing your daily living expenses.

2. Consolidate your credit card debt

If you have multiple credit cards that are stretched to their limits, consider consolidating these debts with a single debt consolidation loan. This loan will pay off all of your credit cards at once, helping you get out of high-interest debt quicker and saving you money that would otherwise be spent on interest.

Instead, you’ll begin making monthly payments on a single lower-interest loan.

Another benefit of this method is that it can boost your credit score, as you’ll drastically reduce your total credit utilization, which accounts for 30% of your total credit score.

Just don’t go back out and get back into the same situation by racking up more credit card debt now that they’re paid off.

3. Tack small debts first

The “snowball method” involves paying off your smallest debts first while maintaining minimum payments on larger ones.

As each smaller debt is cleared, the satisfaction and momentum build, rolling like a snowball towards the next debt. This method not only simplifies your financial obligations over time but also provides psychological wins, which can help you stay motivated.

4. The avalanche method

In contrast, the “avalanche method” targets debts with the highest interest rates first while keeping up minimum payments on the rest.

This strategy may be slower to show progress in the number of debts cleared, but it’s mathematically efficient and will reduce the amount of interest you’ll pay over time. This disciplined approach can lead to significant savings and a faster route to total debt eradication.

How to manage credit card debt wisely

Credit cards, in themselves, aren’t necessarily bad. When used wisely, they have a lot of benefits and can help you earn cash back on your daily spending, points that can be used towards a vacation, and can help you build a rock-solid credit score.

Once you tackle your credit card debt, here are a few tips to help you manage them and make them work for you.

Use specific cards for specific purchases

Be mindful of how and where you use each card so that you get the most out of it.

If you have multiple cards, use them for purchases that allow you to get the most benefit.

For example, a travel rewards credit card will usually give you more cashback or points when used for travel-related expenses such as airfare, eating out, or taxis. Alternatively, a gas station credit card will likely give you the most cashback when used to purchase fuel at the issuing gas station.

Pay off your credit cards before each billing cycle

Do your best to pay off your credit cards before each billing cycle. This will ensure that your total credit utilization rate remains low, which will help you maintain a good credit score.

If you’re unable to completely pay off your credit card by the end of the billing cycle, make sure that you at least make the minimum payment by the due date to avoid a ‘missed payment’ strike on your credit report (which can seriously hurt your score).

Budget to prevent further debt

Ultimately, you should treat your credit card like a debit card. You shouldn’t use it to spend any more money than you can afford to pay based on your current bank account.

This comes down to basic budgeting 101.

If you’re not sure where to start, consider downloading a free budgeting and expense-tracking app to help you get a better view of your financial situation.

Seeking professional help

Feeling overwhelmed? If you’re in a particularly difficult financial situation or have more debt than you know how to handle, it might be time to seek out professional help.

Speaking with a licensed financial advisor or debt relief specialist can help you learn how to take back control of your finances. Additionally, a debt relief specialist may be able to negotiate on your behalf to lower your payments or interest rates and make them more manageable.

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Written for Daily Hive by Christopher Liew, a CFA Charterholder, former financial advisor, and the creator of Wealth Awesome.