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Ask the Expert: What to do if your debt is spiralling out of control

Total consumer debt in Canada reached $2.4 trillion in the second quarter of 2023

Dealing with debt: there are simple strategies that consumers can use to get back on the right financial track.
Dealing with debt: there are simple strategies that consumers can use to get back on the right financial track. (Getty Images) (krisanapong detraphiphat via Getty Images)

As Canadians fall deeper into debt, with credit card balances hitting a record $107.4 billion, experts say there are simple strategies that can get consumers back on the right financial track.

The most recent report from Equifax Canada says total consumer debt in Canada reached $2.4 trillion in the second quarter of the year, with the average non-mortgage debt per credit-active consumer increasing slightly to $21,131.

Millennials have been hit especially hard. A recent report from RBC Economics found older millennials have seen record liabilities and risk falling further into debt as their monthly mortgage payment could climb as much as 25 per cent when it comes time to renew their mortgage.

“[People] are saddled with this debt and they don't know what to do,” said MNP Ltd. president Grant Bazian in a phone interview with Yahoo Finance Canada.

But dealing with debt doesn't have to be a daunting task. Here are some tips and tricks from Bazian and Becky Western-Macfadyen, manager of financial coaching at Credit Canada, on how to manage your debt.

Put pen to paper and write it out

Both Western-Macfadyen and Bazian suggest writing out all monthly expenses and income, which can give you a better picture of your spending and what might be causing the debts.

“You think you're making changes, but you really don't know,” Western-Macfadyen said in a phone interview.

“Write out a budget and track your spending, because then you know what's going wrong and what you need to change.”

Bazian says once you get used to it, writing out a budget is effective at finding your flaws.

“It's a bit laborious when you first do it, but once it's done, it's probably somewhat revealing and very helpful,” he said.

The avalanche vs. the snowball method

Western-Macfadyen says when tackling debts, there are two common approaches: the avalanche and snowball. The avalanche refers to taking care of the biggest debts first, while the snowball refers to tackling more of the smaller ones.

Credit counsellors recommend tackling the bigger debts, even though it might not be the most satisfying option.

“(The avalanche method) is mathematically your best method,” Western-Macfadyen said.

“However, some people do prefer the snowball method, which means you're focusing on paying extra to the lowest-balance debt first because this gives you a little psychological win.”

Consider debt consolidation

Consolidating credit, or combining debts into one payment, is one of the most effective strategies to tackle mounting debts.

By consolidating, interest rates are often lower, making it easier to pay while having fewer bills to stress over.

“If you have a bunch of debt facilities and credit cards, lines of credit with high interest rates, the consolidated loan will pay off all those for you and you still have an interest component, but it's typically on average a little bit less than when you've been otherwise,” Bazian said.

Put your credit cards in the freezer, not the shredder

While you tackle existing debts, it’s also important to rein in new spending.

To limit credit spending, Western-Macfadyen suggests making credit cards inaccessible by hiding them or giving them to a loved one.

“We had one client who put the credit cards in a Ziploc bag and tucked it under the kitty litter box,” she said. “You must really want those cards.”

Alternatively, Bazian suggests going old school with the “envelope system.”

“You basically take a series of envelopes and put a certain quantity of cash in them, for every expense you might have, whether it's rent, groceries, utilities, cable, fun, food, and you don't spend beyond that amount,” he said.

Two things to avoid are cancelling the cards and paying off one credit card with another. Cancelling a card can hurt your credit score in the long run, while the latter is a clear sign of financial difficulty, Bazian adds.

Time to find a side hustle

Western-Macfadyen says to tackle debts, you need to find a way to increase your income-to-debt ratio, whether by limiting spending or increasing income.

“In this day and age, there are many side jobs, our gig economy allows for people to pick up those side things,” she said.

“You always want to know your worth. So absolutely look to your current employer for raises.”

Western-Macfadyen even suggests considering selling some valuable items, but to avoid asking for an advance on a paycheque.

"It's a dangerous slope," she said. “Once you've got that advance from your employer or using a payday loan, there's just no recouping that.”

More tips to deal with debt

  • Avoid 'Keeping up with the Joneses': Matching the spending habits of your friends or neighbours can leave you with a “quick high,” but “burdened with debt,” Bazian warns.

  • Seek professional help: Debt counsellors can help you better understand your situation and an initial consultation is often free.

Ben Cousins is a freelance journalist based in Toronto. Follow him on Twitter @cousins_ben.

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