Debt Management Basics

How to effectively manage your debt when your debt is too overwhelming to handle on your own

Managing debt is an essential skill when dealing with finances. It’s normal to have some sort of debt – such as credit or loans- that allow you to do things like buy a new car and a home, and that allow your children to go to college or university.

With debt being an essential part of your finances, you need to know how to properly manage it to avoid complications. You also need to know how to overcome problems such as what to do if you lose control of your debt payments, and how to handle debt if it becomes more than you can afford.

The following section is structured to help you manage debt. If you have further questions about making out-of-control debt payments, or how to make a payment plan more manageable, then give us a call to chat with a trained credit counsellor, or ask for help with a Free Debt Analysis online.

How to manage debt

Debt management is all about balance. If your debts are balanced by your income, then you will be able to afford to make your payments on time while still paying for your other expenses. Additionally, you may even be able to set some money aside from your budget for savings.

Your debt-to-income ratio is a key factor in assessing your financial health. Check your debt-to-income ratio frequently, and make sure it is below 36 per cent, so you won’t have to deal with serious debt problems.

You also want to make sure that credit card debt payments do not take up more than 10 per cent of your monthly income. If you spend over 10 per cent on your credit cards every month, you will be cutting into your spending and savings. This is where financial distress becomes problematic.

How can credit card debt create problems?

Credit card debt is more problematic than other debts because there is no fixed payment. Unlike a loan for your house or car where you owe the same amount of money each month, credit card debt payment varies from month-to-month.

With credit card debt, it’s easy to spend more than you can afford and get into trouble. The more you charge on your credit card, the larger the payment the following month. Therefore if you rely on your credit card to make large purchases, your monthly payment can quickly grow to an amount that’s unaffordable.

When it’s time to seek debt relief

When debt becomes an issue, it’s important to take the necessary steps to pay it off. Use a credit card debt calculator to help you plan how to get out of debt in the quickest way possible.

If you are having trouble building a debt repayment plan into your budget that will retire the debt within five years, then you need to find an alternative debt relief option.

If you take longer than five years to pay off your debt, then most of your payments are going to interest rather than the principal. Your money is not working efficiently, and you need to find a more effective debt relief plan that works for you.

Finding the right solution when debt is out-of-control

Before you look elsewhere for a debt solution, consider debt consolidation. If you have high credit scores and catch a debt problem early, then you may be able to use do-it-yourself debt consolidation options, such as a credit card balance transfer or a personal debt consolidation loan.

If your credit scores are too low; however, these options may not work for you. You won’t qualify for the low interest rates that will benefit you with lower monthly payments. In this situation, you’ll need additional help if you want to consolidate your debt.

If you don’t qualify for a debt management program, then you can explore options such as a consumer proposal or bankruptcy, where you may experience a greater impact to your credit scores but you will settle your debts for less than you owe. If you don’t qualify for a consumer proposal, then your last option available is bankruptcy.

All of these options can be confusing, if you need help managing your debt, contact a trained credit counsellor today at . You will be provided with free advice as to which debt solution will work best for your financial situation. Or, you may choose to do a Free Debt Analysis online and a counsellor will get back to you shortly.

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AFCC (Accredited Financial Counsellor Canada) is a distinguished professional designation, indicating that a counsellor has successfully completed the program and has specialized knowledge, unique skills and expertise as a qualified Credit Counsellor.

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