8 Ways to Reduce Your Debt During the Covid-19 Crisis
The global Covid-19 pandemic has had devastating effects across the globe. From health problems to financial problems, Covid-19 has already caused problems that may take years to correct. Insurmountable debt is one of those problems. As people have lost their livelihood due to extended lockdown measures, many Canadians find themselves asking the same question: How do I get out of debt with no money?
How Much Debt is Bad?
It’s not really a question of how much debt you have. The real issue is the type of debt you have. There is secured debt and unsecured debt. Secured debt refers to acceptable debt, like a mortgage. Secured debts are not seen as a risk factor if you apply for a loan or credit card, or if your employer needs to complete a credit check.
Unsecured debt refers to consumer debt, otherwise known as “bad debt.” This type of debt tells creditors and lenders that your finances may be out of control. When it comes to bad debt, the amount matters. If you are using more than 80% of your credit limit or if you have a balance that is carrying over month-to-month, this is bad debt. This type of debt will affect your ability to secure much-needed loans, new jobs, or even a new home or apartment.
Unsecured debt is the first type of debt you should aim to reduce. It also affects your credit whereas secured debt does not. You can owe $300,000 on your mortgage on your home and it won’t reflect poorly on you. But owing $10,000 on your credit card for months on end will certainly damage your credit score.
Will Credit Card Companies Forgive Debt?
Generally speaking, credit card companies will not forgive debt. If anything, they will just continue to add on interest and make your total higher by the day. Credit card companies are not your friends. They are not doing you any favors. A credit card can come in handy in life, but it comes with major responsibility. It should not be seen as a tool to get you out of a jam temporarily.
However, if you are able to secure a debt settlement with your credit card company or lender, don’t be so quick. This will have a detrimental effect on your credit score. This can certainly prevent you from securing even small loans that you may need. You may find yourself unable to purchase a car, get a mortgage, or even get a promotion or new job with a debt settlement on your credit report.
How Can I Get Out of Debt if I Live Paycheck to Paycheck?
Getting out of debt is no easy task, especially in these uncertain times we are living in. However, there are things you can do to help reduce your debt even if you have very little money at your disposal. Here are some tips to keep in mind for reducing your debt while living paycheck to paycheck:
1. Make a Plan
No matter what you earn, you need a concrete and detailed financial plan to get out of debt. This means you need to create a document that lists all of your bills and needs. The list should include expenses you cannot forego, like food, housing, electricity, etc. You need to see how much money you are left with after you pay off the essentials to determine how much you can afford to pay back on your debt.
Without a concrete plan, you run the very high risk of overspending and not meeting your minimum payment requirements. This will only damage your credit further and cost you even more money long-term. A detailed financial plan will help you calculate the amount you can reasonably pay to minimize your debt. You may want to pay more to go faster, but your reality may not be equal to that.
Making a strict plan will also keep you focused on your goal and keep you on the right track. Even if you can only afford to pay a little at a time, you may finish your debt sooner with a plan than without.
2. Secure Lower Interest Rates
If you owe money to a credit card company, or to the bank, try to negotiate better rates as often as you can. Or make a habit of using credit cards with the lowest interest rates. Interest can accumulate so much quicker than most consumers realize. If you can only pay a small payment each month, paying off as much as capital as possible is essential to your financial success.
Another thing you should consider are excess fees on your banking plans or penalty fees associated with withdrawing from RRSPs too early. These excess fees and high interest rates can weigh you down even further. Call your bank to switch to a better monthly plan that suits your needs better. Find other ways to pay off debts rather than taking out of RRSPs and getting stuck paying penalty fees out of pocket.
3. Invest in RRSPs
It may seem impossible to save money when you owe so much. But if there is any way you can set aside a small amount from each paycheck to devote to your RRSPs, do it. There are three reasons for this: it keeps you from wasting money, it forces you to save for your future before it’s too late, and it allows you the opportunity to get a tax refund every year. A lump sum tax refund can go a long way in reducing your debt.
When you make a lump sum payment towards your debt, you will notice your interest will decrease dramatically. Interest is going to make repaying your debt take longer. The quicker you can get rid of it or diminish it, the quicker you can expect to pay your debt off.
4. Pay More than the Minimum Payment
Whether it’s a credit card or a bank loan, know that the minimum payment is not helping you. The minimum is the lowest amount you are required to pay each month. However, this also means you debt will take the longest possible time to finish paying. That means even more interest is being paid out of your pocket. It also means you will be dominated by your debt for a longer period. Paying the minimum benefits credit card companies way more than it benefits consumers.
So if you are capable, pay more than the minimum. Pay as much more than the minimum as you can afford to. Even a minimal increase in the amount can make a huge difference in your overall interest accumulation. Paying more than the minimum means you will finish off your debt and be well on your way to financial freedom sooner.
5. Spend Less Money on Non-Essentials
This may seem like a very straight-forward option, but surprisingly, many Canadians overspend every day. Considering the crisis we are living in, avoiding non-essentials should be easy. Whether you are looking to reduce debt or not, you should minimize non-essential expenses and shop around for the best prices before committing to a purchase. If you are looking to cut your debt down quickly, this may be easier to do if you make paying down your debt your primary goal.
It’s not to say that you can never purchase non-essentials. But at least for a period of time, it’s important to reduce your unnecessary expenses to get rid of your debt sooner. Otherwise, you will be foregoing things you enjoy for much longer as the surmounting debt eats up more and more of your income.
If you’re not sure how much you are spending on non-essentials, refer to point one. Make a detailed financial plan and include any expenses you have for a solid 30 days. Review those expenses and you will quickly see how many items you could have done without. Even if the cost is trivial, keep the focus on repaying your debt ahead.
6. Sell Your Stuff
If your debt is overwhelming, it may be very difficult for you to get out from under it. This year, millions around the globe have lost part or all of their income. This global pandemic has taken a financial toll on millions of families. This may be the time to consider selling things off to pay off your debts.
For example, maybe you can trade in your car for a more affordable one. Or you can downsize and move into a smaller home, at least temporarily. If you own any designer items or collectibles, you should consider selling off that which you can part with.
Every extra dollar you can earn to out towards your debt will bring you one step closer to becoming debt-free – even during the worst financial crisis of our times. You may think most of what you have to sell is not very valuable, but that’s ok. When you put it all together, you may actually make way more than you had planned. And again, every little bit counts.
7. Look for a Job in a Different Field
If you have lost your job and are unable to find a new one in your domain, it may be time to consider a different career path – at least temporarily. Whether you want to reduce your debt, you absolutely need at least some income. In case you can’t find a job that pays as much as your previous job, you can either get two jobs, or take one lower-paying job to hold you over until you find something better.
Refusing to work because you can’t find your dream job isn’t going to do you any favours. During a devastating financial crisis like the one we’re living in, we can’t be nearly as picky as we would be during prosperous times. The goal is to get income coming in so you can reduce your debt as quickly as you can.
8. Consolidate Your Debts
Owing money to three credit companies, a collections agency, and two utility companies is not an ideal debt situation for anyone. If you have reached a point where you owe too much to too many different vendors, it’s time to ask for help. Consolidating your debts will help you reduce your overall payments by reducing your interest rate. With only one bill to keep track of per month, paying down your debt will be easier.
If you consider coming to BHM Financial for debt consolidation, you’ll also receive plenty of financial advice from one of our debt consolidation experts. First, they will consolidate your debts. Then, they will work together with you to find a repayment plan that is feasible for you. They can even help you set up a financial plan to keep you from finding yourself in debt troubles again.
If you are trying to pay down massive debt on a small income, you will need help. Call us to see how we can help you become debt-free faster.
Is It Better to Pay Debt in Full or Payments?
Paying debt in full is always great, but it isn’t the reality for many. Payment plans are the standard form of payment when it comes to reducing debt. This is completely fine, so long as you can manage your payments and afford to pay them on time.
If you are on a payment plan, ensure the amount is manageable for you before you commit. Next, set up reminders wherever you can to ensure you don’t miss a payment deadline and risk incurring more interest or a bad credit rating.
What is the Fastest Way to Pay Off Credit Card Debt?
With the increasingly high interest rates charged on credit cards, paying off your debt without help is not going to be easy. You will either have to renegotiate your mortgage to include your bill, or speak with a loan consolidator to resolve your debt. Paying off your credit over a period of months or years it not advisable. In fact, depending on how much you owe, it may be downright impossible to ever finish paying. If you do manage to pay it off, you will notice you paid back more than double what you borrowed in the first place.
The faster and smart way to pay off bill is to take out a personal loan. Then, you just have to focus on repaying your loan, at a lower interest rate, while avoiding adding any more debt to your cards. If you have hard time staying out of credit card debt, it’s a good idea to take a loan to pay them off and then cut them up. This way, you won’t run the risk of getting into any financial trouble again.
Can You Remove Settled Debts from Your Credit History?
Once your bill has been settled, it will not automatically be removed from your credit history. Your credit history will show your credit habits over the last seven years. After the seven year-period, you can expect to see your credit history improve. It should be mentioned that your credit rating can begin to improve quickly after you pay off your debts. However, your credit report will still show certain elements, such as missed payments, late payments, debt settlements, bankruptcy claims, and more.
What Happens if You Cannot Pay Debt?
If you find yourself unable to pay your debts during this unimaginable financial crisis, know that you are not alone. Millions of individuals across the world are finding themselves in this very same predicament right now. You do have a few options here:
- Reduce your spending
- Sell off assets
- Downsize and reduce your expenses
- Scale back or cut out non-essential expenses
- Meet with a debt consolidator
- Create a financial plan that works
If your bill is still too much for you to realistically pay back, you may to consider bankruptcy. However, bankruptcy should be your ultimate last resort. It’s the option you choose when you have no foreseeable way out of your debts. It is not a free pass and the repercussions will be felt for a minimum of seven years.
If you are on the verge of bankruptcy, meet with one of our consolidators today to find out what you can do to avoid bankruptcy. If there is a way to save you from this financial crisis, BHM will find it.
How Does Debt Consolidation Work?
The first step is to pay off all of your debts to creditors. Once the debt consolidator has paid off your debts, you are no longer paying 20% interest on all of your balances. The next step is to place an interest rate on your overall bill, which will be significantly lower than the credit card companies are charging.
At BHM, we will then create a repayment plan based on your individual needs to ensure you can not only make the payments, but still live a reasonable lifestyle while you do it. We will also provide you with the financial advice you need to keep you out of debt.