Exercise some debt control

Exercise some debt control

Tips to get off the debt treadmill


Canadians have been getting into debt at a red-hot pace. The overheated housing market since the beginning of the year, combined with pandemic-induced credit-card use, lifted the household debt to income ratio to 172.3% in the first quarter of the year, according to Statistics Canada. That means Canadians owed $1.72 in debt for every dollar of disposable household income. That puts many Canadians onto a debt treadmill. But there are some strategies for escaping that fate.

For many people, credit cards are the big culprit. If you find you’re living paycheque to paycheque, try to pin down what you’ve been using your credit cards for. Several large one-time purchases, like appliances or home renovations, can add to the debt load very quickly. And this is manageable through controlled spending, a disciplined saving program, or a balance transfer to a personal line of credit or short-term personal loan where the interest rate is much, much lower.

How to pay credit card balances

Paying off large credit card balances might seem like an insurmountable task. But after you’ve put the brakes on your bad borrowing habits, and freed up some extra funds for the month, there are a few tactics you can use to start chipping away at the debt mountain.

1. Minimum payments. Pay at least the minimum monthly payment on every card. Add more to at least one card with the highest interest rate.

2. Balance transfers. A zero-interest balance transfer to a different credit card under a time-limited promotion could give you breathing room of as much as six months with no interest.

3. Premium card switch. If you’re eligible, you may be able to transfer your balance to a premium credit card, which may charge half the interest rate on a regular card. You’ll pay an annual fee, but that will be offset by savings on compounded interest payments.

4. Line of credit. Interest rates on lines of credit are considerably lower than for credit cards, so paying off your credit card balance with a line of credit might make sense. But make sure you pay at least the scheduled minimum amount, preferably more, each month.

5. Personal loan. Another option is ot take out a personal loan at a lower interest rate to pay off higher-interest credit-card loans. Your bank’s loan officer can work out a payment schedule to fit your budget.

Managing mortgage debt

There are a few principles to keep in mind when wading into the mortgage market.

First off, make the biggest down payment you can. At the very least try to match or exceed the threshold beyond which mortgage insurance isn’t necessary. You’re more likely to pass the new stress test rules.

Next, always negotiate for the lowest interest rate you can get. It’s even worth trying to bargain with the big banks if you are a good risk and have a sizable down payment. Consider variable rate mortgages, which typically have posted rates one half percentage point lower than fixed-rate mortgages, only if you have a monthly cash-flow cushion to withstand a sudden rate increase.

Try to reduce the amortization period as much as possible. Yes, the longer the amortization, the lower your monthly payments, but the higher the total interest paid will be. Cut your amortization, even it’s only by a year to begin with. And keep reducing it at the end of every term when it comes time to renew, while maintaining or increasing your monthly payment.

Take advantage of prepayment privileges. If you have the ability to pay off a lump sum of your principal amount without penalty every year, do so! It reduces your principal amount immediately, and your interest costs shrink dramatically over time. Also, make weekly or bi-weekly payments instead of monthly payments. This can also add up to big interest savings over time.

Getting help

Debt stress can be debilitating. To avoid surprises, disappointments, and additional pressure consult with your financial advisor (a fee-only advisor or your local bank’s financial planner) about debt problems. They’ll be able to give you a some good advice on how to get out of the debt hole, and how to avoid getting into it in the first place.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

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