Sign In
Sign In
Personal finance expert Bruce Sellery returns to help get a handle on household spending in the new year.
Get out of debt
Is your debt on your mind? Owing money can often feel overwhelming.
But the good news is, you’ve come to the right place. This step-by-step guide will teach you all the tips and tricks you need to know to help you get out of debt faster and get back to your life.
Book an appointment with an advisor to set up a plan.
Your Guide to Getting out of Debt
-
Step 1
Understanding your debtConfront your debt head on. Being in debt can sometimes feel worse than it actually is. That’s why it’s always better to rip off the band-aid and take a look at it right away before it becomes unmanageable.
Get a complete view of your debt today.
Let’s take a look at the big picture. Where’s your debt coming from? Do you have student loans? Unpaid credit cards? A mortgage? That can feel like a lot to keep track of. Start by writing down each piece of debt you have: who it is owed to, how much is owed, and what the minimum payment is per month. It won’t be fun, but seeing the big picture is an important first step.
Put a budget in place
You’ll need to know how much you can afford to pay down debt every month. To get to this number, you’ll need a budget that tracks all your income and spending. Try our simple step-by-step guide to budgeting to put this in place.
Keep a close eye on your money
It’s good to get more aware of your day-to-day spending, so you can match up transactions on your account to your budget. Turn on Scotia InfoAlerts to get notifications of all major transactions so you can avoid any surprises at the end of the month.
-
Step 2
Restructure your DebtThe chances are that you are paying more interest than you need to, based on the types of debt you have. Restructuring your debt can lower your interest payments, freeing up much-needed cash to help you get debt-free faster. There are a few different ways to do this.
Switching to lower interest rate credit card
Many credit cards have high interest rates. Look to see if one is available to you with a lower interest rate.
Consolidating your debt
If you have multiple loans or credit cards, you can combine them all under a new credit application to take advantage of a lower annual interest rate and payment. This might be under a new loan or line of credit that enables you to pay off and close those other cards for good. Booking a meeting with a Scotia advisor can help you find the best solution.
Homeowners – consider STEP
If you own a home, but also have outstanding debt like credit cards, STEP might be for you. STEP (which stands for Scotia Total Equity Plan), helps you use the equity you hold in your home to consolidate your debt, which can lower your portfolio interest rate and monthly payments. Ask an advisor to walk through how STEP can help you.
-
Step 3
Pick a debt-paying methodOnce you organize your debt, choose a tried-and-true method to pay it down. Either of these will help to pay down debt, but pick the one you feel will be faster or more achievable for you. The method you choose will help you choose WHICH debt to pay off first.
The debt avalanche method
This method focuses on paying off the debt with the highest interest rate first. After that’s paid, you shift to the debt with the next highest interest rate and so on. It’s a highly efficient way to pay down debt.
The debt snowball method
Many people find this method easier to stick to. The goal here is to start by paying off your smallest debt first. This can create a sense of accomplishment, so you can use that momentum to move on to the next debt.
-
Step 4
Use the 50/30/20 ruleHow much of your paycheck should go towards your debt payments? This can vary, but a good place to start is to follow the 50/30/20 rule. This means that 50% of your spending should be spent on must-haves, 30% on wants, and 20% on paying down debt.
50% - Must haves
Essential spending that you have you can’t avoid: rent, mortgage, utility bills etc. Pay these as soon as they are due and keep track in your budget so you are up to date.
30% - Wants
These are non-essentials, but they help keep you and your family happy. These are meals out, treats, trips, etc.
20% - Paying down debt
Now you have listed and restructured your debt, use 20% to pay off debt. Once you’ve calculated how much this is, a great tip is to set up a Recurring Payment (for credit card balances) or a Recurring Transfer (to pay down a Scotiabank Line of Credit). Set it for the day after you receive your pay check or other income.
Terms you should know
Here’s a cheat sheet to help you understand the language around debt.
Assets
An asset is anything you have of value that can be converted into cash. Common assets are cash, property, or investments.
Bankruptcy
Filing for bankruptcy is a legal process that can eventually relieve you of your debt obligations. However, it also lowers your credit score which can make it very difficult to get a loan, credit card, mortgage, or even an apartment in the future.
Credit counselling
There are many non-profit agencies that can offer you education on budgeting and paying down your debt. You can find a trusted one here.
Credit score
A credit score is a value between 300-900 that shows your creditworthiness (i.e. how much a lender can trust you to pay back a loan). The higher the score, the better you look to a lender. Getting too close to, or going over, your credit limit and missing payments will lower your score. You can keep track of your score on your mobile banking app.
Default
To be in default means to have failed in making your loan payments for some time. This can reduce your credit score and lead to seizure of property.
Interest rate
This is how much it costs to borrow money. This is the percentage of a loan that you must pay back in addition to the money borrowed.
Liability
A liability refers to the amount of money you’re responsible for paying back such as a credit card balance.
Mortgage
A mortgage is a home loan. It’s considered a good debt because a home builds equity over time.
Revolving debt
Revolving debt (ex: credit card debt) is credit you can borrow from a lender over and over again, up to a certain limit. Your monthly payments aren’t fixed amounts but depend on the balance.
Secured debt
This kind of debt is secured against some kind of collateral, such as your house or your car. If you default on a secured debt payment (i.e. mortgage or car loan payment), the property can be used to pay back the lender.
Unsecured debt
Unsecured debt isn’t attached to property or an asset and is generally associated with high interest. To be eligible for this kind of loan, you need to be a borrower in good standing. Credit cards or lines of credit are examples of unsecured debt.
Frequently Asked Questions
Let’s get you ready
Congratulations on taking the first step of managing your debt by reading this how-to guide. Dealing with debt can feel overwhelming, but with focus, patience, and a good financial plan, you could become debt-free faster than you think. And we’re here to help you on this journey.
Related articles
76% of Canadians are worried about the rising cost of living and the impact this has on their personal finances.
Tips on saving while enjoying getting out more in your community.