The average Canadian household owes $1.71 for every dollar of disposable income, according to Statistics Canada. An increase from $1.63 in the second quarter of 2020; however, considerably less than the $1.81 seen in the fourth quarter of 2019.
According to Equifax Canada, rising mortgage balances pushed the average debt to $73,532 per person. However, non-mortgage debt decreased by 3% nationally to $23,035.
At the start of the pandemic, many consumers spent less, paid more attention to their balances and rapidly reduced their debt, decreasing credit card balances by 12.3%. Still, credit card spending gradually crept back up again in June.
Many people continue to feel the financial stress brought on by the pandemic and face challenges ahead. Canadians may take on additional debt as financial accommodations end.
Six tips to avoid excessive debt
Many financial products like credit cards, for example, have high-interest rates that can add up over time. By staying out of debt, you can save money and enjoy greater financial flexibility.
While staying out of debt is not always possible, there are many ways to make it more manageable. Let’s look at some simple tips for avoiding too much debt.
1. Create a budget
The best way to avoid debt is to create a budget and only spend as much money as you can afford. By taking the time to write out your income sources, bills, and debts, you can better visualize your financial situation.
Try to reduce spending where you can and use any extra savings to help pay down your debt. Use your budget to stay on track and spend within your means.
2. Pay more than the minimum payment
When you make the minimum payment on your credit card, a large proportion of the amount is used to service the interest you owe. To pay down the principal of your balance, try to pay as much of the amount due as you can.
If you can avoid high-interest debt altogether, it will pay off in the long run. A good practice is to pay off your credit card bill in full at the end of each billing period. This habit can ensure your credit card benefits like points or cash back can be rewarding instead of offset by interest charges.
Paying only the minimum payment can lead to compounding interest charges and a lingering balance.
3. Pay off high-interest debt first
Credit card debt is likely your most costly form of debt over your mortgage or car loan, so you’ll want to target this debt right away.
If you have multiple credit cards, pay off the balance that has the highest interest rate first. Once you finish paying off that balance, continue to work toward paying down the remaining cards.
By doing this, you’ll save money in interest charges and keep your debt more manageable.
4. Consolidate credit card debt
If you carry balances on multiple high-interest credit cards, consider getting a balance transfer credit card. These cards usually have an introductory interest rate that can be as low as 0%. These promotions typically last for six to 12 months, giving users lots of time to use this feature and avoid costly interest charges. Usually, cardholders will be subject to a balance transfer fee of between 1% and 3% on the amount transferred. That is generally less than what the user would have to pay in interest on their standard credit card.
You can use this initial period to start paying down your debt faster; however, keep in mind, the lower interest rate doesn’t generally apply to new purchases. If you are serious about paying down your balance, you will want to cut your spending and take advantage of the balance transfer period.
Related read: Best Credit Card for Paying Down Your Balance in Canada for 2020
5. Earn on the side
Generating multiple revenue streams is a great way to get some extra cash to help pay down debt. Whether you sell some of your belongings, freelance online, or get a part-time job on the weekends, making more money can help you get out of debt faster.
Once you pay down your balances, you can kick back and relax, knowing you’re debt-free.
6. Quit expensive habits
Expensive routines and everyday vices can add up quickly. A $2 coffee, a $6 breakfast sandwich, an $8 latte, or a wallet-draining $15 package of cigarettes each day can end up costing you more than you think. Consider eating at home or packing lunch to save some money. Instead of selecting a rideshare service, try taking public transportation and work on quitting your bad habits—they affect not only your finances but also your health.
Every little bit counts and can help you get out of debt.
