My finances 5 min

Debt repayment made simple

Tips and tricks that’ll take the stress out of repaying your debts.

By Fonds de solidarité FTQ

Now that credit is so readily available, it’s become easier to suddenly find yourself with uncomfortable levels of debt. Sorting out fees and repayment schedules may sound complicated, but it doesn’t have to be. You can take the stress out of debt repayment—we’ll show you how!

Make a list of all your debts

The first and most important step to choosing a repayment strategy is making sure you’re aware of all your debts. That means listing all the amounts you owe, complete with interest rates (zero percent still counts), minimum monthly payments, and all other related charges, such as late fees and penalties.

Mortgages, car loans, active credit cards (even those you no longer use), unpaid bills, open lines of credit—even those notorious “Pay nothing for a year!” plans—should all be included on this list. This exercise will give you a clear idea of where you stand and prevent you from overlooking any sources of debt.

Optimize your budget

The next step is determining how much you can afford to set aside for debt repayments. This is where creating a budget is crucial. Drawing up a budget will show you exactly how much money you make and, most importantly, how you spend it. This will give you a better grasp of your variable expenses: the ones you have control over and can therefore aim to decrease, or even eliminate, in order to free up funds for repaying your debts.

Prioritize your debts

Prioritizing is the best way to get a sense of your progress.

Mortgages and student loans are examples of “good debts,” which often come with lower interest rates. Good debts are long-term investments toward goals such as furthering your education or landing a higher-paying job. Though you’ll still eventually need to pay them back, good debts generally aren’t your biggest burden.

Bad debts, on the other hand—unnecessary expenses that lead to maxed-out credit cards or new furniture purchased on a buy-now-pay-later plan—are those with the steepest interest rates and penalties. These are the debts you want to tackle first.

Ranking your debts by size and interest rate will help you determine which ones are bad. This will make setting clear goals much easier.

Consolidate and renegotiate your debts

There are a few things you can do right away to reduce your interest and make the debt repayment process even simpler.

One of these is consolidating your debts under a single loan with a lower interest rate. For example, you could transfer your credit card balances to your home equity line of credit or ask your financial institution to group all your debts under a consolidation loan. This would get rid of your highest interest rates, making it possible to afford larger payments and pay off your debts more quickly.

You should never be afraid to speak to your creditors about negotiating better repayment terms. For instance, you could ask to extend your repayment period and lower your monthly payments, which would allow you to continue making payments without incurring penalties. As a matter of fact, credit companies, including major organizations such as Hydro-Québec and Revenu Québec, often agree to arrangements with their customers because it helps ensure they’re paid back on time. It never hurts to ask—you’ll be surprised how accommodating creditors can be!

Customize your repayment strategy

The best repayment approach is the one that keeps you motivated from start to finish. That’s why it’s important to choose one that fits your lifestyle. Below are three of the most effective strategies.

01The snowball method

This method involves paying off your debts one by one, starting with the smallest. You benefit from an immediate sense of accomplishment that keeps building as you go through your list. The downside is that you’ll be paying more interest, meaning it’ll take you longer to become debt-free.

02 High interest first

With this method, you won’t feel the same quick boost of motivation, but you will pay the least amount of interest in the long run. The idea is to make all your minimum payments but to pay off debts with a higher interest rate, such as credit cards, first. You’ll stop paying interest sooner, pay back what you owe faster, and quickly move from one debt to the next.

03A bit of both

You can also use elements from both strategies. In the event of identical interest rates (e.g., two credit cards at 19 percent), make the smaller debt your priority. You’ll be able to pay it off more quickly, which will motivate you to keep going.

Review your plan regularly

Given that your situation is bound to change, it’s important to revise your plan on a regular basis. Instead of following it blindly, keep an eye out for opportunities.

A mortgage renewal, for instance, could be the perfect time to speak with your financial institution about consolidating your debts or renegotiating your loan terms.

Receiving an unexpected tax refund or that $100 you never thought you’d get back from a friend could be just the pick-me-up you need if your motivation is low. But beware of sudden changes to your loan terms. For example, the initial zero percent interest rate on your brand-new household appliance set could jump to 19 percent in two years. Similarly, if you have a variable rate mortgage, an increase in the prime rate could increase your monthly payments or home equity rate. It’s best to keep on your toes!

Build smart financial habits

In addition to following a debt repayment strategy, you can make things easier for yourself by adopting smart financial habits.

Making sure never to spend more than you earn, for instance, could help you minimize your debt and start saving for future projects. Simply revise your budget on a monthly basis, or at least every two to three months. The upshot? You’ll always know your game plan and be able to quickly see where you need to adjust.

Avoid customer financing plans that push you to buy what you can’t necessarily pay for up front. By sticking to purchases you can afford right away, you won’t have to worry about unexpected payments, interest, or banking fees.

Finding creative ways to add to your income (in French) can also make a difference in your budget.

These healthy habits will help you learn to master your finances and take control of your debt. Of course, you shouldn’t expect to become completely debt-free. Debts related to your home or vehicle, for example, are likely to be around for much of your life—hence the importance of understanding how to manage them. Your debts should work for you and your life projects and never prevent you from saving for the future.

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