Credit cards – most of us have at least one. They are incredibly convenient and often make life easier when it comes to doing anything from making hotel reservations to ordering clothes online. However, as credit card debt increases overtime across Canada, it seems the risk to cash flow and overall finances is a major downside to having a credit card. In fact, Canadians now owe around $74 billion on credit cards. It is easy for anyone to fall behind on payments – situations including job loss, major life changes like divorce, and emergency expenses can all allow credit and interest rates to rack up. So, how to pay off credit card debt when many of us owe thousands? Although it can be challenging, it is certainly possible by applying some discipline and approaching different strategies. For those truly struggling with credit card debt, there are also a number of debt relief solutions to clear your debt and enable you to begin a fresh financial future. In this article, we explain how to pay off credit card debt.
How do Canadians get into credit card debt?
Unfortunately, it is all too easy to get into credit card debt. Part of the problem is that the amount you borrow each month is likely to vary, making it difficult to know exactly how much you need to keep aside for repayments. The more credit card payments you make, the harder it is to make your repayments. The fact that you can also simply make a minimum payment which is usually a fraction of your total bill means that it is all too easy to escalate. Many Canadians find themselves living paycheque to paycheque, often resulting in little to no savings. As if all this was not enough, most credit cards come with high interest rates. These high rates mean much of your minimum payments go towards covering interest charges. In turn, this makes it harder to pay off the principal of your credit card debt. Ultimately, many individuals find it increasingly difficult to make their full repayments each month. It results in living with a high credit card balance, and many people accumulate multiple credit cards in the same situation.
How long does it take to repay credit card debt by making minimum payments?
To take an example, an average interest rate on a credit card is 20%. If you owe $1,000 on a credit card debt, most credit cards typically have a minimum payment of just 3%. If you only make the minimum payments of 3% each month, it will take you over five years and dozens of payments to pay off your balance completely. This is inclusive of some hefty interest charges, which will make up a proportion of over 50% of the original debt. Even if you exceed your monthly payments to around 10% of the total debt, it will still take almost a year for you to pay off your balance. Once again, this will lead to around 10% additional payment in interest charges. As you can see, there is no fast way to repay credit card debt by making minimum payments alone. The key to paying off credit card debt is to see how you can pull additional funds to go towards making your repayments.
How to pay off your credit card debt
There are some simple tips you can implement to pay off credit card debt more quickly. For instance, you could try out a debt reduction strategy, where you prioritize credit card balances for repayment in two different ways:
- The avalanche method – prioritizing your debts from highest to lowest interest rate, and paying off the highest rate debts first of all. With this method, you make minimum payments on all debts, but use any leftover funds to go towards the debt with the highest interest rate, and so on. It is a good way of reducing the amount of interest you will pay in the long run.
- The snowball method – prioritizing your debts from lowest to highest total balance while making minimum payments on other debts. You pay off the lowest balances first before moving onto the next lowest until all are paid off. This is a good method for giving you motivation as you will see the smallest debts paid off quickly.
Either method means you will need to pay more than the minimum payments on the first debt you are tackling. You should try to use any additional funds you have to make the maximum payments you can afford on the debts you are prioritizing. Learning how to budget is key to freeing up more of your money to go towards repayments. Once you are done with one debt, you move onto the next until they are all completely cleared. It is important to note that both of these strategies involve higher interest rates than debt relief solutions, but it does mean you do not have to take out additional credit to do so. Your credit report will also likely take less of an impact. Other tips for credit card repayment include:
- Only take out a credit card when you have a clear need for the credit, and a way to repay the debt
- Focus on debt repayment if your credit card minimum payments exceed 10% of your income
- See if your credit card company can reduce the interest rate on your balance
- Do not use credit cards in place of income – you should be able to cover your expenses with cash
- Do not think that making the minimum payments on your credit cards is enough
- Always make your credit card payments on time, otherwise your credit score will take a hit
- Do not use more than 30% of your available credit, else your credit score will begin to decrease
Credit card debt relief solutions
If struggling to make your credit card repayments sounds all too familiar to you, it is time to take action. In order to pay off credit card debt quickly, you will need to pay well over the minimum monthly payment. This will start to reduce the principal debt. If this seems impossible for you to achieve right now, it may be time to consider a form of debt relief. Having some reflection on your financial situation is helpful here. Is it just credit card debt that you are struggling with? Or are there other debts that are making it difficult to repay your credit cards? No matter how bad you feel your financial situation may be, there is always a debt relief solution to help you. Here are some of the top methods of how to pay off credit card debt:
A debt consolidation loan
Debt consolidation is the process of taking out a new loan to combine multiple separate debts. It has the primary advantages of simplifying your debt into one monthly payment, and often reducing or even clearing your overall interest rate. It is possible to combine debts including credit card debt, payday loans, personal lines of credit, and home equity lines of credit (HELOCs). It has the benefit of helping you in how to pay off credit card debt faster, and can boost your credit score. You should note that as it involves taking on a new debt, you should have a good credit report to qualify.
A debt settlement in Canada is the process whereby a debt settlement company or a debt consultant attempts to negotiate with your creditors on your behalf to reduce your overall debt. This is most often in exchange for a fee, and is usually a case of offering creditors a lump sum or agreeing on a repayment plan to clear your debts. As debt settlements are usually carried out informally, there is no guarantee you will gain debt relief so you should be wary before moving forward with a debt settlement. If in doubt, check in with a reputable Licensed Insolvency Trustee – they are the only professionals legally able to file all forms of debt relief.
Filing a consumer proposal
A consumer proposal is a great way to reduce your credit card debt (and any other unsecured debt you may have) by up to 80%. You will work with a Licensed Insolvency Trustee to propose an affordable monthly amount to repay your creditors. Your trustee will then work to negotiate this with your creditors. There are various advantages of a consumer proposal, including a stay of proceedings to offer protection from creditors, a freeze on interest and penalties, and the ability to keep all of your assets. They are a great way to make overwhelming credit card debt much more manageable. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.
In some cases, bankruptcy is necessary to starting a fresh financial future. It is the process of assigning any non-exempt assets over to a Licensed Insolvency Trustee in exchange for clearance of your remaining unsecured debts. Bankruptcy does mean you can be cleared of your debts within nine months if it is your first bankruptcy. You should be wary, however, of the disadvantages of bankruptcy too – you can lose your assets and it will have a negative impact on your credit report. First time bankruptcies will remain on your credit report for six years.
If you are unsure of how to pay off credit card debt, you should talk to a reputable Licensed Insolvency Trustee immediately. At Spergel, we can help you to pay off your credit card debt and begin a fresh financial future. Book a free consultation at your convenience, and our trustees will review your financial circumstances and suggest the best way to pay off your credit card debt as quickly as possible.