Debt management: How to pay off your debt

16 November 2023 by National Bank

Young couple preparing a plan to pay off their debts.

Credit cards, lines of credit, loans – there’s no shortage of credit options. But credit can also lead to debt. If you want to start paying yours off, here’s a five-step plan to help you achieve your goal.

In this article: 

Identify your debts and draw up a balance sheet
Restructure and negotiate your debts
Review your budget
Determine your repayment method
Rebuild your credit and maintain a good credit score

1. Identify your debts and draw up a balance sheet

Identifying your debts is the first step in creating a solid game plan. To do this, make a list that includes:

The total value of your debts
The in terest rates for each one

We also recommend taking the time to create a balance sheet. This portrait of your personal finances, which includes your assets and liabilities, will give you an overview of your situation and level of debt. You’ll then be able to make informed decisions about the most appropriate course of action.

We’ve got a tool to help you take stock of your finances:

Make a balance sheet

Helping hand: It’s easy to lose track of credit and loans. You’re not alone – debt can affect anyone. The most important thing is getting it back under control. If you find you’re feeling anxious, take a deep breath and remember we’re here to help and keep you motivated.

2. Restructure and negotiate your debts

Restructuring your debts means consolidating them to improve your financial situation and reduce the interest you have to pay each month.

What’s debt consolidation? It’s the process of combining all your debts into a single loan with a more preferential interest rate whenever possible. For example, if you have a credit card bal ance with a high interest rate, you could pay it off with a loan at a lower interest rate. This allows you to save on the interest you’ll have to pay on the balance.

This option may be available from your financial institution under certain conditions such as an acceptable credit score and a reasonable income.

→ Check out our article to learn more about debt consolidation.

Expert tip: Do you have a mortgage? If so, you can use a home equity line of credit to consolidate your debts. This type of line of credit generally offers lower interest rates than credit cards, for example. Look into it and see if it’s a good option for you.

Negotiate your debts

Good news: Some debts can be negotiated. Don’t hesitate to contact the people or institutions from whom you’ve borrowed money and ask them to adjust certain aspects of your loans.

Credit companies and financial institutions are sometimes open to offering better terms to ensure that they’re repaid. They might, for example, push a repayment deadline and reduce your monthly payments, allowing you to avoid penalties and delays that could damage your credit score. If you have tax debts, it’s also possible to negotiate terms with the tax authorities.

Keep in mind: If you’re behind on several payments, contact your financial institution’s collection department. They can help you restructure your debts and potentially make arrangements to get your repayments back on track.

Last-resort solutions

Sometimes debt can feel insurmountable. In worst-case scenarios, there are more radical options, including consumer proposals and personal bankruptcy. In some situations, this may be the only option for restoring your financial stability. But although this approach can help you free yourself from certain debts, it will remain on your credit score for at least six years. Keep this in mind before choosing to go this route.

→ Visit the Office of the Superintendent of Bankruptcy website to find out more about consumer proposals.

3. Review your budget

Once you’ve drawn up a list of your debts, you need to work out how much you have available to pay them off. To do this, you first need to draw up a budget or adjust the one you already have.

Icon of a lighted bulb with a dollar sign

Tip: Having all your accounts in one place will help you get a clearer picture of your finances. Here’s how to add external accounts held with other financial institutions to your online bank. It’s a practical solution that will give you a complete overview of your income and expenses, making it easier to create your budget.

The 50-30-20 rule

The 50-30-20 rule is a good way of freeing up money to pay off your debt. It involves dividing your income as follows:

50% for your basic needs – rent or mortgage, utility and telecom bills, groceries, etc.
30% for non-essential expenses – restaurants, outings, gifts, and treats.
20% for debt payment – put this amount towards your debt using the repayment method of your choice.

Need help with your budget? Check out our article. You can also find helpful tools online, such as the federal government’s budget pla nner or our budget cal culator.

Should you continue to save while paying off your debt?

Yes, it’s a good idea to devote a portion of your income towards savings, even if it’s less than you’re used to. In other words, save less, but keep saving.

Here are three good reasons to keep putting money aside:

Save on taxes: Depositing money in an RRSP or TFSA reduces your tax bill and earns you a tax refund that could go towards paying off your debts. Two birds with one stone!
Avoid future debt: Saving up to build an emergency fund for unexpected expenses can help you avoid going into debt later on.
Securing your future: Putting money aside regularly, even a small amount, can help you carry out a project or ensure a more comfortable retirement. Despite your debt, you need to keep thinking long-term.

4. Determine your repayment method

The high-interest method

This involves prioritizing debt with the highest interest rates. If you have two debts of equal value but with different rates, you’ll know which one to pay off first. As a general rule, credit cards have the highest interest rates while student loans have the lowest. This method will help you to pay off your debts as efficiently as possible and reduce what you pay in interest.

Good to know: Not only is the interest on a student loan lower, but it can also reduce your tax bill. The federal government and some Canadian provinces offer a tax credit for interest paid on student loans. For more details, visit the Government of Canada website.

The snowball method

This involves paying off the smallest of your debts first and then proceeding in order of size. This method is interesting from a psychological point of view. It allows you to reduce your number of debts quickly, which keeps you motivated since you feel like you’re making progress. Note, however, that this method could cost you more in interest.

Other considerations to keep in mind

Whatever method you choose, these two key factors should help guide your choices:

Mandatory payments – Even if you prioritize the repayment of one debt over another, make sure you continue to make the minimum payments on all your debts.
The deadline for repayment – If a debt has a specific deadline, make sure to account for it when making your repayment plan.

5. Rebuild your credit and maintain a good credit score

Accumulating debt can have a major impact on your credit report, especially if you miss payments. As a result, your credit score can suffer. But don’t panic, since there are ways to put things right. Here are some tips for rebuilding you r credit a nd maintaining a good credit score in the future.

Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial to learn more. Don’t have a specialist in charge of your file? Make an appointment.

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