Budgeting, credit options may be your best debt-fighting tools

Fifty per cent of Canadians who currently carry a balance on their credit card say they almost never pay their account in full, according to a Harris Decima survey released this week.

To make matters worse, 25 per cent of respondents say they will need more than a year to pay off their balance, while another 5 per cent believe they will never be able to pay off their credit card debt, says the survey conducted on behalf of credit counselling and bankruptcy trustee firm Hoyes, Michalos & Associates Inc.

Canadians are drowning in debt. The latest figures from Statistics Canada show the average debt-to-income ratio for Canadian households is a staggering 1.64 per cent. For every dollar made, Canadians owe $1.64 in secured and unsecured debt, prompting many to make 2013 the year for debt reduction.

“A lot of people are becoming conscious about their debt levels and wanting to put a plan in place that helps them do something about it,” says Jason Round, head of financial planning support for RBC Financial Planning.

Debt is manageable, no matter how astronomical the grand total may be. Extreme measures, such as declaring bankruptcy or pursuing a consumer proposal, can be avoided with some simple budgeting basics.

“Most people are not aware of their ability to control their debt,” says Stephanie Holmes-Winton, owner of The Money Finder and member of Advocis, the Financial Advisors Association of Canada.

Round agrees.

“I think it’s probably fair to say that the majority who come in to talk to us don’t really know too much about the options they have available to them,” he says.

Budgeting is key

Determining your cash flow (net income minus expenses over a specific period of time) is the first, and sometimes only, step needed to resolve debt.

Once consumers get an accurate picture of their fixed expenses versus discretionary spending, it’s easy to determine where one needs to cut back in order to allocate more funds to debt reduction.

“Starting up regular increased payments on the debt is [an option],” says Round. This could mean paying more than the fixed rate, or increasing the frequency of payments.

Different credit products are available

Consider other forms of credit to reduce interest payments and accelerate your repayment schedule. Holmes-Winton says those who don’t own property should look into an unsecured line of credit. “It’s usually the cheapest way to pay back debt,” she says. Lines of credit often have lower interest rates and flexible terms compared to other forms of consumer debt.

A personal loan could also work, especially for those who want a fixed monthly rate and end date for their debt. At the same time, interest rates are higher than lines of credit, and personal loans have less flexible payment options. A personal loan is usually distributed in a lump sum payment to the borrower whereas a line of credit allows borrowers to tap into their credit on an on-going basis, which could be a source of temptation for habitual borrowers.

In some cases, choosing to refinance (replacing a current debt with a new one using different terms) or applying for a debt consolidation loan (which combines multiple debts and replaces them with one monthly payment) may be better options.

To determine what option is best, do some research, speak with an expert and make sure you understand the terms before signing on the dotted line.

In the end, both Round and Holmes-Winton agree it all comes down to changing spending habits, budgeting and establishing a plan. These three strategies make up the foundation of successful debt reduction.

“Without the actual cash flow harnessed and pushed on to the debt,” says Holmes-Winton, “It's very difficult to get rid of debt at any kind of pace.”

“Anything related to trying to reduce your debt load or increase your savings is going to take discipline,” adds Round.