The Best Ways for Canadians to Get Out of Debt

You can get out of debt with a few easy steps. 

We’re all here because we want to achieve a state of financial wellness. Let’s talk about one of the THE ABSOLUTE first steps that needs to be taken on this journey. 

Getting out of debt

Getting out of debt can help you grow your finances, get access to high end travel credit cards, and travel the world without a sense of financial guilt.

Before we talk about the different approaches when tackling debt, we first need to understand the difference between good debt and bad debt. On average, if you put money into the stock market, or have some sort of retirement vehicle, you should expect to see at least 6% return. “Good Debt” is debt that is less than 5% interest. Mortgages in Canada typically fall somewhere in the 4% range, so this would qualify under “good debt”. 

Paying off “good debt” loans such as your mortgage can be beneficial in a number of different ways, but it’s important to understand that the difference in interest rates between your house and your credit card bill are drastically different, and should be dealt with in dramatically different ways.

According to Equifax Canada, the average Canadian has roughly $23,800 of non-mortgage debt attached to their name, with student loans, credit cards, personal lines of credit, and auto loans primarily making up that number. 

If you scour the internet for methods on how to properly tackle debt, you will notice a few trends and commonalities within the gluttony of information available. I’ve curated the information required to enable Canadians to properly tackle their debt. 

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Here are 5 methods That Can Help You Get Out of Debt

1. The Avalanche Method 

The avalanche method to paying off debt is very simple. You pay off the debt with the highest level of interest rate first, regardless of the balance. 

Hypothetically, if you have 4 different debts: 

Debt Type	Interest Rate	Balance
Automotive	7.00%	$12,500
Personal	6.00%	$7,000
Credit Card	19.99%	$3,000
Student Loan	$4.99%	$20,000

With the avalanche method, you would pay off the debts listed above in the following order 

• Credit Card
• Automotive
• Personal
• Student Loan 

The great thing about the avalanche method is that it mathematically makes sense. Paying off the highest interest rate first will reduce the amount you have to give to creditors. The downside of the avalanche method is that it may take a while for you to see any eliminations of your debts (especially if your highest debt also has the highest interest). 

2. The Snowball Method 

The snowball method was brought to popularity by personal finance guru Dave Ramsey. Unlike the Avalanche method, the Snowball method suggests that you pay off the small amount of debt first, regardless of interest rate. The reasoning behind this is psychological rather than financial. 

Taken directly from Dave Ramsey’s website: 

The debt snowball works because it’s all about behavior modification, not math. When it all boils down, hope has more to do with this equation than math ever will.

If you start paying on the student loan first because it’s the largest debt, you won’t get rid of it for a while. You’ll see numbers going down on the balance, but pretty soon you’ll lose steam and stop paying extra. Why? Because it’s taking forever to get a win! And you’ll still have all your other small, annoying debts hanging around too.

But when you ditch the smallest debt first, you see progress quickly! You have hope! That debt is out of your life forever. The second debt will soon follow and then the next. When you see the plan working, you’re more likely to feel like you can stick it out. And when you keep at it, you’ll succeed in becoming debt-free!

By the time you’re paying on the bigger debts, you have so much cash freed up from paying off the earlier ones that it creates a debt snowball. Suddenly, you’e putting hundreds of dollars a month toward your debts instead of slowly chipping away at them with minimum payments. You build momentum, and that changes your behavior and helps you get out of debt for good.

Looking at our earlier example: 

Debt Type	Interest Rate	Balance
Automotive	7.00%	$12,500
Personal	6.00%	$7,000
Credit Card	19.99%	$3,000
Student Loan	$4.99%	$20,000

With the snowball method, you would pay off the debts listed above in the following order 

• Credit Card
• Personal
• Automotive
• Student Loan 

3. Credit Card Balance Transfers 

If you’re currently carrying a balance with multiple credit cards, it could be a huge hurdle to overcome when looking at achieving a state of financial wellness. Different credit cards have different interest rates, and it’s imperative to understand if lower interest rates are available to you.

For example, if you are carrying a balance on two credit cards: 

Credit Card A – $5,000 balance @ 19.99% interest 

Credit Card B – $8,00 balance @ 6.99% interest

You may be able transfer the $5,000 balance to the card with the lower interest, ultimately reducing the amount of interest you pay over time. There is commonly a balance transfer fee, but in most cases the amount of interest saved outweighs the fee. 

Sometimes, credit cards offer a promotional short-term 0% APR for new signees, which can be leveraged to even further reduce the amount of interest paid. 

4. Leverage a Personal Loan to Pay a Credit Card

For whatever reason, you may be in a position where your credit card debt is too high to pay off in a single transaction, or you are unable to transfer your balance to a lower APR credit card. In circumstances like this, all hope is not lost. 

One method to paying off credit card debt is to secure a personal loan (with a lower interest rate), and get rid of that credit card debt immediately. In this circumstance, it is simple mathematics. You will still have a line of debt that you’ll need to focus on, but the interest rate will be lower, ultimately allowing you to reach your debt-free goal earlier. 

You’re able to acquire a personal loan at either one of your local banks or credit unions. As with most purchases, it is important to shop around and get a few quotes. 

Another positive aspect of this method is that securing a personal line to pay off your credit card statements can improve your credit score, as a personal loan is considered an “installment loan.”

5. Debt Settlement 

If you find yourself under a mountain of credit card debt, another option to consider is debt settlement. This solutions works for individuals who are past due with their credit card payments, but also have a lump sum of cash they can contribute to the payments

Debt settlement is a negotiation in which a creditor agrees to accept a partial payment to satisfy your credit card debt rather than the full balance. Things that are brought up during the negotiation that can work in your favour include:

• Job loss
• Divorce 
• Health issues

You have the option to hire a third party to help with your negotiations. The government of Canada provides guidelines for Canadians should they choose to use a debt settlement company

What to watch out for when considering a debt settlement company

High-Pressure Sales

Some debt settlement companies offer their services through aggressive telemarketing calls. High-pressure sales practices create a difficult environment to make clear decisions. If you get a call, don’t feel pressured to agree to something right away.

Unrealistic Promises

Be aware that some debt settlement companies may make unrealistic promises about what they can provide. They may promote their services in a misleading way.

Debt settlement companies cannot:

• guarantee to reduce your debts by a large percentage
• ensure your creditors will always agree to participate in debt settlement negotiations
• prevent creditors and collection agencies from garnishing your wages or taking money from your bank account if you have a bank account with them and owe them money
• stop your creditors from trying to recover the money you owe in court
• stop phone calls from creditors
• offer legal protection from creditors’ actions such as seizing assets
• handle government-regulated proceedings that release you from debt, which are part of consumer proposals and bankruptcies. Only a licensed insolvency trustee can offer you these two options.

Some companies may also offer you a loan suggesting it will help repair your credit score. The company may claim that making timely payments on this loan will repair your credit. When you sign up for this type of loan, you may never actually receive any money because the company will tell you the loan amount will cover its services or programs.

Instead, you make regular payments to the company to repay the loan. Be aware this type of loan usually has a high interest rate. This service does not help eliminate any of your other debts. You’re required to keep making your payments on any other debts you owe. You may only be left with more debt and no change to your credit score.

High Fees

You may be required to pay upfront or advance fees or monthly fees. You’ll likely still be charged the upfront or advance fee even if the company is unable to get creditors to reduce your debt. Fees charged by debt settlement companies may be very high.

Delayed Payments

Some debt settlement companies intentionally delay making payments to your creditors. They do this in the hopes of getting better results in negotiations to reduce your debts. This will hurt your credit score because it can make it seem like you’re less able to repay your debts. Always ask for receipts for any payments you make. It’s important to know what is happening with payments to your creditors.

Before You Sign up for Debt Settlement

Make sure you do the following before you sign up with a debt settlement company or agency.

Research the Company’s Reputation

Do a background check. Find out if there have been any serious or unresolved complaints about the agency. This includes late payments to creditors or false advertising.

Check for complaints made to:

• the Better Business Bureau
• l’Office de la protection du consommateur (Quebec)
• your provincial or territorial consumer affairs office

Review the Contract Carefully

Don’t agree to anything under pressure. If you decide to sign up with a debt settlement company or agency, read the contract carefully before you sign it. Ask questions if you don’t understand any of the terms and conditions. Make sure you keep a copy of the contract.

Don’t sign anything or agree to any service before researching the company.

Making a complaint about a debt settlement company

Provincial and territorial governments are responsible for regulating settlement companies and investigating consumer complaints.

Contact your provincial or territorial consumer affairs office.

Conclusion: The 5 Steps To Get Out Of Debt 

1. Make a list of current debts. Keep the list somewhere handy, and cross off debts as you go
2. If you currently have debt with high interest, the first step you should take is to look into lowering that interest rate. We’ve used the example of credit card balance transfers & personal loans. This first step helps immediately reduce your monthly expenses 
3. Set a budget. There are several different budget methods outlined in this article. Pick one, and make sure you stick to it
4. Now that you’ve set your framework, it’s time to start tackling your debt. Pick one of the methods above (or a combination of a few), and stick with it
5. Celebrate your wins! Putting your head down and getting out of debt can be hard, and it’s important for your mental health to come up for air every now and again. Make sure you allow yourself a few celebratory checkpoints along the way

 4 Tips to Help on Your Financial Wellness Journey 

1. If you’re currently in debt, stop everything and develop a plan to get out of it 
2. Develop a budget to go alongside your debt repayment strategy 
3. In the future, avoid (where possible) purchases where payments are made in installments with high interest (>3%)
4. Once completed, begin to allocate 10-15% of your monthly income towards your retirement plan.