The Best Debt Reduction Practices for Canadian Consumers
Tuesday, May 6, 2014
Only 24 per cent of Canadians are debt-free, and this number is steadily dropping. Some debt is obviously unavoidable; few of us would not have been able to afford homes and cars if we did not borrow the money to buy them. But this does not absolve Canadian consumers of the responsibility to reduce the amount of debt that they carry. The average non-mortgage debt carried by each Canadian reached $15,920 in 2013, up from $13,141 in 2012. With the exception of those hit by tragedies like Alberta's flooding, these numbers indicate that some serious debt reduction practices are necessary.
- The best strategy for reducing debt is to use ones income to pay off existing debt instead of spending it on luxuries. One can often get quite far by cutting back, instead of cutting out entirely. Make a budget, and carry a printed copy in your wallet or an electronic copy on your phone.
- Ask your bank for a lower interest rate on your loans. This includes your credit card. If you have a generally good credit record, it is likely they will approve it. If they say no, you will be no worse off.
- Pay as much as possible on the highest-interest card while paying the minimum amounts on the others.
- If it is feasible, transfer all the debt to your lowest interest loan. This is usually your mortgage.
- Distinguish between non-profit debt-counselling and for-profit debt reduction or debt settling. The former has aided many Canadians to develop workable budgets, spending discipline, savings plans and future financial planning.
- The Financial Consumer Agency of Canada has been harshly critical of debt reduction or debt settlement companies, and many such practices have even been outlawed. Such companies enable consumers to withhold payments to their creditors, and encourage them to save their money in a high-interest account from which they can offer their creditors a lump sum payment at some point in the future. There is a catch with this strategy however and that occurs with the fees that these companies charge inside the first two or three months, after which they have no interest in continuing to deal with creditors on the consumer's behalf.
Commit to a reduction in your debt, but do not panic about it to the extent that you become a target for unscrupulous scammers.
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