Paying Down Debt in 2016
By Carla Hindman, Director of Financial Literacy, Visa Canada
If you're in debt, you're not alone. Holiday spending can leave many people with the difficult task of paying off those bills in the New Year. A recent poll from CIBC suggests that paying down debt remains the top financial priority for one in four (26 per cent) of Canadians, for the sixth year in a row.
Reducing the amount of debt you're carrying can have long term benefits to your financial health. Here are some tips to help you reevaluate your debt repayment plans and get ahead this year.
Assess your debt. Do you actually know how much debt you have? Many people don't. Before you can tackle your debt, you need to know what you owe and how much interest you are paying. Start by making a list of everything you owe, whether it's a mortgage, a credit card or student loan(s). Write down the lender's name, the amount you owe, the term of the loan and the interest rate/fees. Once the list is completed figure out the total balance.
Know your score. We all change over time, and so do our credit scores. A credit score is the numerical value used by lenders to assess individuals' "credit risk" at a given time. It changes based on history of payments, accounts owed, new credit applications and more. The higher your score, the better. Make sure you know your score – it's important because it influences whether you'll be approved for credit cards, mortgages and other loans, as well as the interest rates you're offered.
Create a realistic budget. Reducing debt is like losing weight. You're not going to lose 50 pounds in a month. You need to set realistic goals in reasonable timeframes. Same with debt -and knowing where your money goes is an excellent starting point. In order to reduce your debt load you must create a realistic budget. Track your spending for a month to see where your money is really going, then create a monthly budget by adding up your income, estimating expenses and figuring out the difference. Consider using online banking or mobile banking apps to create spending limits and alerts to help you stay on track with budgeting.
Cut Spending. Cutting back is usually a better place to start than completely cutting out. Be realistic. It will help you be more prepared for unexpected costs. Question your needs and wants, and evaluate your current financial situation by taking a look at the big picture.
Consolidate debt. Is it the right time to consolidate your debt? Debt consolidation is a form of debt refinancing where you're essentially taking out one loan to pay others – but at a lower rate of interest. Check out Visa's Practical Money Skills' consolidation calculator to see what your monthly payment would be with or without a consolidated loan, and how many months it will take to become debt free.
Talk to an advisor. If you discover that you've gotten off track or need help realigning your financial goals, consider working with a financial advisor. Talking to an advisor can help you create a plan, reduce interest costs and get out of debt over time.
Bottom Line: Reducing debt is crucial for your wellbeing and for weathering the good and bad financial milestones in life. Reevaluate your debt repayment plans and start 2016 off on the road to financial stability.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.