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Ways to reduce personal debt after the holidays

Jan. 2, 2024
3 mins
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This article has been updated from a previous version.

Hopefully everyone had a great holiday break, and you were able to visit family, exchange presents, take advantage of the sales on Boxing Day and celebrate the New Year. Post-festivities quickly transition into the time of year when the anxiety starts to kick in with the anticipation of the credit card bills showing you just how much those celebrations cost.

According to the recent RATESDOTCA survey commissioned by Leger, 42% of Canadians are carrying a non-mortgage debt of more than $5,000 this holiday season. This includes any credit card debt, car loans, student loans, lines of credit, and others.

Top tips for reducing personal debt

Pay off high interest debt first

You should always tackle your highest interest debt first, which for many people is their credit card debt. For example, say you’ve divided up your holiday shopping on a few different credit cards, and a line of credit.

Credit card interest rates are typically the highest and these cards can charge upwards of 20-30% annually. On the other hand, a secured personal line of credit has an average interest rate of 6.57% set by the Bank of Canada as of late 2023.

While these rates can fluctuate based on market trends, ultimately, it's best to make payments on your credit card before your line of credit to lower interest debt.

If you have an outstanding balance on your credit card, you can also consider transferring it to a balance transfer credit card.

These cards allow you to transfer an outstanding balance from one credit card to another, so you can avoid paying interest on your original balance. Generally, low interest rate offers last 180 days or up to a year. This way you can make payments against the outstanding amount rather than the interest, and pay it off more quickly.

As with any card, always make sure you review the terms and conditions before applying.

Related: Personal loan vs. Line of credit: Which should I get?

Review your mortgage

Another good strategy is to review your largest debt - which is typically a mortgage. Many Canadians are throwing away a substantial amount of money when it comes to mortgages.

If your mortgage is due for a renewal soon, pause before you instinctively renew with your current lender. Make sure you do your research and compare mortgage rates to secure the most competitive deal. If you can’t qualify with a new lender, you may also be able to refinance at renewal for more favourable terms on your existing mortgage.

Also, always make sure you speak to a mortgage professional before making any decisions.

Another way to eat into your mortgage debt quickly this year is by changing your payment schedule. If you’re currently paying down your mortgage with fixed monthly payments, but can afford a bit more, consider moving to a bi-weekly rapid payment schedule.

This will increase the amount you pay off on your mortgage each year but make a significant debt on the overall interest you pay.

Read more: What to do if your mortgage is up for renewal and you’re seeing an ugly interest rate

Consider consolidating debts

Most people have various types of debt outstanding, such as a mortgage, credit card balance, personal loan, line of credit, and a car loan. You’re likely paying different interest rates on different forms of debt.

In some cases, it might make sense for you to consolidate your debt into one loan. A debt consolidation loan works just like any other type of loan. The idea is that with your approved loan, you’ll use the money to pay off any high-interest debt you have.

This type of loan would allow you to replace various bills with one regular payment and repay a single lender instead of multiple. You may also be able to score a lower overall interest rate, enabling you to pay off the debt more quickly.

Keep in mind that certain types of debt like car loans and mortgages can’t be paid off with a debt consolidation loan.

Speak to your financial institution/planner/mortgage broker to see what your options are. There are also not-for-profit organizations that help people and provide free debt management advice such as Credit Canada.

Consider your cash flow, set a budget and account for inflation

The New Year is the time for making resolutions, so why not make one of your resolutions this year to set and maintain a budget? Not only can this help you to avoid overspending, but it can also help you make a plan to pay off any debt.

But before you get started with your budget, you need to prepare a cashflow to paint a true picture of where you currently stand with your finances. Your cashflow should track both the money you have coming in and out.

Maintaining the discipline to keep a budget throughout the year can be a challenge, but there are easy-to-use personal finance tools out there that can help you – just browse through the app store on your phone and you’ll find an abundance of options.

If you have multiple accounts with different banks or credit card companies, you can consolidate all your accounts into one statement which will make life much easier. Using budgeting software is a good first step towards getting your debt under control.

Lastly, don’t forget to account for inflation. Grocery prices have risen more sharply than all items in the Consumer Price Index since 2021. With interest rates and living costs rising, your budget should capture the impact of increased costs for goods and services.

The topic of inflation greets us in headlines and conversations every day. And it’s a reality that requires your adjustment. You should review your budget and make changes several times a year.

Read next: 3 ways to save more money in the new year

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Penelope Graham

A first-time homeowner and newbie investor, Penelope Graham is the quintessential millennial, navigating the world of personal finance and wealth management. A self-professed monetary policy nerd, she follows the often-controversial housing market closely and specializes in mortgage, credit card and personal finance news.

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