Six Steps to Get Out of Debt

Do you find yourself frequently paying bills after their due dates, bouncing cheques or receiving calls from collection agencies? These can all be warning signs of debt becoming unmanageable.

The good news is that there are steps you can take to get your finances back on track.

This guide is built to help you map out a plan for taking control of and managing your debt. It provides you with key steps to take, tips and links to more information and tools that will help you along the way.

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Step 1: Make a budget

Making a budget is the most important step in taking control of your finances. A budget is like a roadmap for your finances: it tells you how much money you have, where it comes from and where it needs to go.

To build a budget, first identify how much money you have coming in and how much of it is going out. Be sure to keep track of all your expenses and your debts, such as loans, credit cards and lines of credit. Your expenses should include all living expenses, such as your mortgage (or rent), utilities, groceries and insurance. Include as much detail as you can.

The Financial Consumer Agency of Canada provides a comprehensive budget planner that can help you get started.

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Step 2: Check your credit health

Your credit report and credit score are two of the main tools that lenders use to determine whether or not you are a good candidate for credit products. Lenders want to know if you will be able to pay your bills on time.

Your credit score goes up and down based on the information in your report. For example: making regular payments, on time, will gradually make your score rise, but missing payments will make it drop. In Canada, credit scores range from 300 to 900. Scores of 600 and over are considered to be good. Scores of 750 and over are generally considered excellent.

If you have a good credit score, you may be able to borrow money at a lower interest rate and pay less interest over the long term. Having a poor credit score can make it difficult to qualify for loans, credit cards, leases or mortgages and sometimes results in higher interest rates. Your credit history can also affect your eligibility for some debt repayment options.

Take time to check your credit health every so often. Check your credit report and make sure that there are no errors in the report. Checking your personal credit report will have no effect on your credit score. You have the right to know what information is on your report and can get a copy of your credit report free of charge.

Improving your credit score takes time but there are many things you can do, such as using a secured credit card and making sure you meet all your minimum monthly payments. The Financial Consumer Agency of Canada has more advice on what you can do to improve your credit.

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Step 3: Map out a plan

Not sure where you should focus your efforts to start taking control of your debt? There are many strategies you can use to manage debt and start paying it off.

One option is to start by paying down the debt with the highest interest rate first. This means you'll pay less interest over time and will reduce your overall debt sooner. Another strategy is to start paying down the debt with the lowest balance. Knocking off a few debts quickly can help build momentum and motivate you to continue.

If you don't know where to start, consider booking a consultation with a budget or credit counsellor. They can help you identify debt management opportunities and build a debt reduction strategy. For example:

  • Are there opportunities to consolidate loans (also known as debt pooling)?
  • Are you able to negotiate your debt with your lenders and/or creditors?
  • Are you working closely with your mortgage lender to find the best solutions for your budget?
  • What kind of approach should you take with credit cards?

Remember, seeking help is not something that you should be afraid or ashamed of. A counselor will work with you to get you back on track and in control of your finances, or figure out an alternative solution.

Do your research! There are some less-than-reputable companies in the marketplace who may try to attract your attention with promises to help erase your debt and solve financial problems. Know your rights and check with your provincial regulator for more information on different debt management solutions.

Here are some resources on finding a reputable budget counsellor and how to tackle debt consolidation:

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Step 4: Take control and take action

Once you've taken the time to create a budget and develop a plan, it's time to put it into action.

Whether you have chosen to make your own plan or are working with a credit counsellor, stick to your plan and be consistent. Try to make the minimum payments on all your debts by their due dates. When you do, any extra money you have from your budget can be put towards paying your target debt.

However, be realistic. If you cannot meet the payments you have set out in your plan, you may want to investigate alternatives. If you haven't already done so, this would be a good time to involve a professional.

Remember, sticking to your plan may not always be possible depending on your situation. The trick is to try and take control of your debt before it becomes overwhelming.

Here are some additional resources and tools on debt repayment:

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Step 5: Stretch your dollar

Following a tight debt management plan can leave you trying to find ways to stretch every dollar. It is important to take a good look at your expenses to see exactly where you can save money.

First, look at your budget. Are there small things you can do to save and bring down recurring expenses? Solutions can be as simple as planning your meals for the week to save on food, planning your commute to save time and money on gas, or adjusting your thermostat to save on your energy bill.

Next, take a look at your fixed costs. Many Canadians find themselves to be house poor – often paying too much for living expenses, such as their mortgage, insurance, utilities and more. The result is not having enough money to meet other financial needs. Becoming house poor is not always something you can control, but you can try to find ways to reduce some of those costs.

If you're having trouble with your mortgage, talk with your mortgage lender and work together to try and find a solution. Take a look at your insurance policies and compare rates; you may be able to get a better rate with your broker or an even better deal somewhere else. Likewise, you may be able to get a better rate for services such as telephone, television or Internet. Reducing those monthly costs could save you money over the course of a year.

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Step 6: Planning ahead

Once you're on track with your budget and have a debt management strategy, you need to keep an eye on the future.

While your budget will likely include amounts for savings and emergencies, you should always prepare for larger purchases, such as buying a car, household appliances, or even a new home. Plan and research these purchases before you make a financial commitment and make sure that you know what you can truly afford. For example: there may be additional costs beyond a vehicle's finance payments, or beyond your home's mortgage payments that need to be considered. These can add up and put a strain on your budget.

Here are some additional resources that can help you to start spending smarter.

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Moving forward

Now that you have a budget, have assessed and organized your financial situation and put a plan in place, be sure to continue looking for ways to save money and spend smarter.

This 6-step process provides you with a basic path to improved financial security, but should you need more information, your provincial or territorial government provides resources to help you stay on track!

Provincial and Territorial Consumer Affairs Offices

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