Learn Debt Management How to Pay Off Debt

Guide To: How to Pay Off Debt

There are various reasons we may find ourselves in debt – job loss, medical emergencies, accidents – and we are always looking for solutions on how to get out of debt fast. Most of the time, these reasons are beyond our control. However, there are also times when we spend more than what we earn because of our bad spending habits.

According to Equifax, Canada's consumer debt hit a staggering record of $2.08 trillion by the end of the first quarter of 2021. This is an increase of 0.62% from the fourth quarter of 2020, with mortgages rising by $99.6 billion from the fourth quarter of 2019 to January 2021.

Being in debt is like having a constant weight on your shoulders that you can't get rid of. You'll feel stressed and anxious, which can affect your physical and emotional health. Luckily, there are ways to deal with debt.

Here at iCash, we have worked with hundreds of individuals, families, companies, and organizations looking for ways on how to pay off debt and back on track. If you're currently in debt or planning to start a debt repayment plan, these tips will give you a head start.

Find your motivation to pay off debt

A debt repayment plan is not possible if there's no motivation to do it. If you don't have a reason why you need to stop borrowing money, you won't be able to resist the temptation of using your credit cards again.

Debts have detrimental health effects on us. According to the latest study by FP Canada, 38% of Canadians indicated money as the number one stressor with 51% of respondents saying they have lost sleep stressing about money and debts. Stress makes it even more difficult to budget and save the little you have.

How to pay off debt

There are several ways to stay motivated, including:

   • Setting specific and realistic goals, for example, making regular payments.
   • Choosing a debt management system like the debt snowball method helps you pay off the debt by organizing all your bills from the smallest to the largest amount due.
   • Rewarding yourself after achieving your debt repayment plan in a stipulated period. However, the reward must be small to avoid getting deeper into debt.
   • Automating payments - setting a recurring automatic payment helps you avoid the temptation of spending money irresponsibly when you make payment.

Know how much you Owe

Although it can seem challenging, it is crucial to know how much you owe. Having a clear understanding of the amount owed can empower you on how to overcome debt.

List all your debts, including mortgages, credit cards, student loans, and auto loans. Add up the figures to see how much debt you owe. With a figure in mind of how much debt you have, you can now finally develop a scheme for how to pay off debt.

Debt to income ratio

A common way to know how your debt compares to your income is by using the debt to income ratio (DTI). This ratio calculates your debt against your income which shows how much money you spend on debt repayments compared to your income.

You can use a DTI to determine how well you manage monthly debts and whether you can afford to repay a loan. Bankrate's DTI calculator is a great option you can use. Add up all your monthly debts and divide the sum by your monthly income. For example, if your monthly debt is $2,000 and your gross monthly income is $8,000, your DTI ratio is 25% (0.25).

Get your credit report

Next, get your credit report and check for any patterns of bad behavior or inaccuracies. A credit report is a statement showing your credit activity, your loans, current credit status, and the status of your existing credit accounts. You can get your credit report and rating from Equifax, Experian, or TransUnion.

Once you have your credit report, check for the credit score, activity inaccuracies, and the accounts affecting your credit rating. Remember, your rating can move from green to red after one or two late payments. Late payments hurt your credit score. That's why it's essential to check for any signs of delinquency. However, you may still be eligible for a bad credit loan if you need more funds.

Create a budget, track and reduce spending

A budget is an essential tool in debt repayment. Budgeting allows you to create a spending plan for your money and helps ensure you have enough money for all the things you need and are important to you.

Create a budget to pay off debt

When you create one, you'll know how much money you can afford to spend on certain things like groceries and entertainment. Understanding your spending habits helps you identify areas draining your cash and those you need to cut back. However, you can take emergency loans if you want to settle an important item on your budget.

Pay more than the minimum installment

Adding some extra payments to your monthly minimum payment can help you reduce your debt fast. Making minimum monthly payments goes towards paying interest fees rather than lowering your debt.

It may seem impossible to pay an additional $50 each month, but it can help you settle your debt faster and reduce the amount of interest charged on your credit card debts. Ensure every month you pay your balance in full to avoid paying interest charges and late payment fees.

Choose a debt-paying method that works for you

Once you've identified how much debt you owe, your credit score, and the amount of money you can afford to pay every month, choose a debt-paying plan that works for you. You can choose between two great options, but I recommend choosing the one you feel will help you repay your debt faster.

Difference between debt avalanche and debt snowball methods

The debt avalanche method

The debt avalanche method starts by prioritizing your debts from the highest interest rate to the lowest. First, paying off creditors with higher interest rates reduces how much money you owe and helps you repay your debt faster.

The debt snowball method

The debt snowball method works by repaying your creditors with the smallest balances first. This approach gives you a psychological boost because you see progress every month. This creates a sense of accomplishment that helps you stay motivated and eventually repay your debt.

Make more money

Earning more money can help you repay your debt faster if you are struggling with debt repayments. Some of the ways you can use to make more money include:

Get a second job

Getting an extra job is a great way to earn more money to repay your debt or manage your monthly expenses. For example, you can do photography, tutor high school students, or teach dance lessons. You can charge like $30 an hour, which is a great way to make more money.

Start a side business

This involves working on projects outside your full-time job and selling the products. If you're good at marketing, you can sell your products online using platforms like eBay and Amazon.

Sell your old stuff

I am pretty sure you have old stuff in the house that you don't need anymore, like video games and consoles, books and DVDs, and electronics. You can sell these items online to keep your cash flow consistent. For old DVDs and books, you can sell them on Amazon or eBay.

Ask for a pay rise

You can ask for a pay rise by meeting with your employer and sharing how you've been performing in your position. If your company is doing well, they may be willing to fulfill your request.

Change your employer

You can also look for a better-paying job and change your employer by finding a job that pays well. You can use job sites like Monster, CareerBuilder, and Glassdoor to find new opportunities.

How to make more money

Refinance debt

Refinancing debt refers to replacing your current debts with a new loan at a lower rate and longer repayment term. You can take unsecured loans to reduce your monthly debt payments and repay debts faster. By refinancing your debt, you can save up to $5,000 each year.

Bank transfers

Bank transfers involve moving an existing debt owed to a different card. If you have a current credit card debt, you can choose to transfer it to another credit card with lower interest rates.

If you have a high-interest credit card debt, transferring it to a new card with 0% introductory APR could help you save money. For instance, if you have a debt balance of $3,000 in one credit card with 15% APR, you can transfer it to a new credit card with 0% APR and save up to $450 in interest.

Debt consolidation

Debt consolidation is the act of applying for a new loan to pay off multiple high-interest loans. This allows you to have one monthly debt payment, usually at a lower interest rate, instead of multiple payments.

However, ensure you consult with your financial institution to know what types of debts you will manage to pay off. Also, avoid using the freed-up credit as it can lead to more debts than before.

Use the cash envelope system

A cash envelop system is a very effective way to manage your money. It's a visual budget to help you stay on track with your budget. You will need a cash envelope for each month's expenses and savings goals, and you will decide the amounts to put into each envelope depending on your spending habits.

Although it doesn't work for everyone, it's a great option to see where your money goes to. The cash envelop system encompasses variable spending like groceries, household supplies, beauty, and entertainment.

Negotiate your debt

Most people are afraid of negotiating with their creditors because they think they will be held accountable for their debts. You can write an email, letter, or call your creditors and explain that you are struggling financially and see if they can develop a better plan for you.

Adopt the 50/30/20 rule

Most of us find ourselves in debt because of our poor spending habits. One great way to divide your income is by adopting the 50/30/20 rule. This means that 50% of your income is for fixed expenses like rent and utility bills, 30% goes to non-essentials like traveling, family treats, etc., and the remaining 20% is a good amount you can use to pay off your debt. If you have a credit card loan, you can set up a recurring transfer to pay off the debt.

Don't take more debts

It's so easy to take on debts. However, it's much more challenging to pay them off. So, to avoid taking on more debts, try not to take out loans. Before you sign up for any credit card or loan, be sure that you have a concrete plan on how you will pay it back. Also, don't take out too many loans at once because you might get overwhelmed and end up thinking about how you will pay everything back.

Commit windfalls to debt

If you get a stimulus check or a tax refund, don't spend that money on treats. Commit it to your debt because it will help you pay off your debts faster. You can commit the whole windfall or split it between paying your debt or saving for a vacation.

Credit counseling and debt management

I get it. Sometimes, despite how much you work hard and save, getting out of debt is not easy. This can have a negative impact take a toll on your mental health. In this case, credit counseling and debt management are the way to go.

A credit counselor like the Credit Counselling Canada can help you get a handle on your debt by directing you to a person in your area who can formulate a plan for you to get out of debt.

The counselor works like your coach, guiding you through the debt repayment process and can negotiate your credit card debt and help you consolidate your loans and debts.

Under the debt management plan, a third-party company negotiates your interest rates and payments amount with your creditors. The third-party company can pay all your creditors when you make the monthly payments.

Bottom line

Getting out of debt is a journey. The most crucial step to make is by starting the repayment process. With the right plan and approach, you can get out of debt faster than expected. Find the motivation to pay off your debt, calculate how much debt you owe, get your credit report, and create a budget to help you track and reduce spending.

You can use several ways to make more money, refinance your debt, do a bank transfer or use the cash envelope system to track your spending to help reduce your spending and repay debts faster. If you can't get out of debt, you can always credit counseling services.

The last thing you want to do is let your debts overwhelm you and demotivate you from living your life. If you need fast, safe, and easy loans, iCash can help. Visit our website to learn more and gain access to tons of financial advice to help you save money.