Getting out of debt is a personal journey. It’s important to choose the right strategy to meet your needs and fit your lifestyle. Here are some things you should consider when preparing your debt repayment plan:
- Don't take on more debt. If you continue to spend beyond your means, it will be difficult to realize your goal of being debt-free.
- Find more money to pay down your debt. Review your budget and list ways you can cut down on your spending. For example, make coffee at home instead of buying it. Consider selling some of your assets or taking on additional work to bring in extra money.
- Make at least the minimum payment on all your debts by the statement due date. If you do not, you will harm your credit history and score.
- Try to set a payment time frame that is reasonable, but fast enough to make progress. If your time frame is too long, you may lose focus due to a lack of progress on paying off the debt quickly. If your time frame is too short, you will be overwhelmed and feel it is unrealistic to continue.
- Once a debt is paid off, close that account. You do not need the temptation of that available credit to pull you back into debt. You will need to keep some credit and loan products in order to rebuild your credit, but only keep what you need and can manage responsibly.
- If you have a personal loan with family or friends, sit down and commit to a payment schedule that works for both parties. Write post-dated cheques to them in order to keep to the payment plan and to show them you are committed to repaying them.
- If your debt has gone to collection, see Tips for dealing with a debt collector.
Mortgages may be considered a long-term debt, but there are strategies to pay down your mortgage faster. The type of mortgage agreement you have will determine what you can do to pay down your mortgage faster.
For additional help in planning to get out of debt, use our Financial Goal Calculator.
Tackle your debt yourself
Once you have created a list of all your current debts, including the minimum payments required and the interest rate for each loan, there are two ways to try to pay off your debts:
- Start with the highest interest rate
By paying off the loans with the highest interest first, you will pay less in interest costs and you will be debt-free sooner.
List your debts in order from the highest interest rate to the lowest. After you cover any minimum payments required on all your debts, put any extra money for debt repayment against the loan with the highest interest first.
- Start with the lowest balance
For some people, it is easier to start with their lowest balance. The feeling of accomplishment of paying off a debt happens sooner, and that can keep you motivated to stay on track with your debt-free goal. However, this option will cost you more in interest over time.
List your debts in order from the lowest balance to the highest. After you cover any minimum payments required on all your debts, put any money left for debt repayment against the loan with the lowest balance first.
No matter which option you choose, once a debt is paid off, take the money you were applying to regular payments and apply it to the next loan on your list.
Talk to your creditors
Contact your creditors and discuss your financial situation with them directly. You may be able to negotiate a lower interest rate or they may offer to consolidate your debts into one loan instead of several. The most important thing is to be proactive, honest about your current situation, and willing to work with your creditors to get back on track financially.