How to manage and repay debt
With interest rates and the cost of living on the rise, staying in control of your finances can sometimes become a source of concern, and with good reason. Here’s how, by adopting good habits to manage and pay off your debts, you can reduce your financial stress.
A simple debt optimization strategy
Here are a few steps to follow to efficiently view and prioritize all of your financial commitments in order to pay off your debts in the best possible way.
- List all your debts: mortgages, car loans, lines of credit used to finance renovations, purchase of furniture or appliances in equal instalments, unpaid credit card balances … don’t forget anything.
- For each debt, indicate the amount due, the interest rate, the minimum monthly payment, the payment date, the authorized credit limit and all other associated expenses (for example, late fees). You can use the Manage debt feature in AccèsD. Some fields (for example, interest rates) will already be filled if your financial commitments are with Desjardins.
- Make or update your budget by assessing how much of your income goes toward paying off your debt.
- If debt consolidation is not possible, prioritize paying off your highest interest rate debts. This will save you more in credit charges and possibly speed up the repayment of your other loans.
Discover the Manage debt tool
Through a series of questions, the Manage debt tool in AccèsD provides information on your debt level and personalized advice to optimize the management and repayment of your loans.
Consolidate debt to simplify repayment
In some cases, debt consolidation can be used to consolidate your financial commitments and replace them with a single periodic payment. Since this approach generally results in a lower interest rate, it can be used to reduce the payment amounts or repay everything sooner.
Use credit appropriately to prevent debt
Credit allows you to get what you want immediately and can also be used to simplify the management of your expenses. Choose an appropriate financing method for your project. For example, you could centralize most of your purchases on a single credit card and ideally pay off the entire balance before maturity. Also, depending on your situation, you may also be able to use a home equity line of credit to finance improvements to your property.
“Good” or “bad” debt?
Some forms of financing help you achieve your goals and build your wealth, which can be called “good debt.” For example, a mortgage can be used to acquire a second home that you will benefit from and that could increase in value over the years. On the other hand, borrowing for a trip or an item that loses value over time could be considered a “bad debt.”
Good to know
Two borrowers are responsible for 100% of the debt when their contract stipulates that the debt is joint and several. In other words, each commits to individually pay off the entire balance, not just “their half”. The same principle applies to the co-signer who commits severally, or solidarily, and who is therefore responsible for the entire debt if the borrower fails to repay it. Whether or not the person benefits from the loan, it appears on their credit report and is taken into account when calculating their debt level. Being the guarantor of a loved one or borrowing with them will thus have an impact on your own financial situation and in assessing your risk for future credit applications. It’s best to be aware of this before guaranteeing a loan for one of your children, for example.
Review certain expenses due to inflation
Rising costs of living affect transportation, groceries, materials, real estate and many other goods and services. In this context, taking a moment to review your budgetcan be beneficial. First reassess your discretionary expenses. It will be easier to suspend them if necessary. Also ask yourself about your short-term expenses and their importance in relation to your financial goals. For example, do you need to build a second bathroom or replace your vehicle this year?
Avoid withdrawing money from your RRSP to pay off a debt!
With rare exceptions (such as to finance a return to school or with a Home Buyers’ Plan), withdrawals from a registered retirement savings plan (RRSP) are added to taxable income for the year and contribution room is lost. Using your RRSP to pay off debt is generally not a good idea.
Once your situation allows it, make room for savings based on your financial capacity. Here’s a tip: once you’ve repaid your debt, continue to withdraw the amount that was spent on it and save it.
Planning for your goals will also allow you to limit or avoid creating new debts, thus reducing your financial stress.
In an ideal world, set up an emergency fund - the equivalent of 3 to 6 months of living expenses—to avoid resorting to credit for unexpected expenses.
For personalized support on managing your debts, contact your Desjardins financial advisor. This valuable resource will help you implement a repayment and savings strategy tailored to your personal situation.