Across the country, people are starting to buckle under debt. As of early 2023, Canadians owed about $1.85 in credit market debt for every dollar of disposable income — a combined outstanding debt of $2.32 trillion, according to TransUnion. This May, the Canada Mortgage and Housing Corporation reported that Canadian households have the highest debt-to-GDP ratio of any G7 country. Number-wise, the only way to steer clear of debt is to spend less than you bring in, said Doug Hoyes, licensed insolvency trustee and co-founder of debt relief firm Hoyes Michalos. “But that’s not easy to do in practice,” he said. “Because if you live in Toronto, and rent is $2,000 a month, and your pay cheque is $2,500 a month, what are you supposed to do?” While it can be difficult to keep debt in check when the cost of living is increasing, there are ways to get back on track, Hoyes said. Two common strategies recommended by financial experts are the “avalanche” and “snowball” approaches to paying down debt. A debt avalanche prioritizes interest rates, while the debt snowball pays attention to balances. In both cases, you cover your minimum payments first. Where the extra cash goes is where the methods differ. For instance, if you owe money on five different loans and credit cards, a debt avalanche dictates you devote extra funds to the highest-interest loan first. “Once that debt is paid, you roll your funds onto the next highest-interest rate loan,” said Anne Arbour, director of strategic partnerships at the Credit Counselling Society. “With the snowball method, it’s the debt with the smallest balance that becomes the focus of your attention,” Arbour said, adding that you would continue by paying your loans in ascending order of balance. Which method is best suited to you largely depends on personality, she said. “Analytical people might lean toward the debt avalanche method because in the long run … you’re going to save money,” Arbour explained. “With the debt snowball, there’s a bit more of a psychological win.” “You get some instant gratification because you’re paying off a full balance sooner.”Motivation is an important factor to consider when developing a debt strategy, Hoyes said. “We all know we should get up in the morning, and go for an hour-long run and floss our teeth three times a day … but we don’t do that,” he said. “You’ve got to do what’s actually going to work for you.” He noted that the psychology of the snowball method might be more appealing to those with a large number of debts to settle. Beyond which method works best for your mindset, Hoyes said you should also consider the kinds of debts you have, and to whom you owe them. “On payday loans, if you’re paying $15 on a $100 … how do you figure out the interest rate on that?” Hoyes said. He added that payday loans are often debts with both the highest interest and smallest balance — they would come first regardless of which method you use. Another exception could be if you owe money to an organization like the Canada Revenue Agency. Even if the debt you owe the CRA has the lowest interest rate, you typically have to pay them as soon as possible, Hoyes said. “All they send you is something that says you’ve got to pay us now,” he said, as opposed to a monthly credit card statement with a minimum payment. “Traditionally, the CRA is willing to accept payment plans where you pay over 12 months.” If you crunch the numbers using either strategy and the time it would take to pay down all your debts is unrealistic, Hoyes said it’s better to accept that sooner rather than later, and seek out the help you need. “You’re better off at that point … filing a consumer proposal, or going bankrupt to officially eliminate the debt.” To avoid getting to that point, Hoyes said it’s critical to try to eliminate the amount you’re able to borrow as you pay down your debts. Some strategies to accomplish this include lowering your credit limit, cancelling your credit card, or converting your card to a fixed-term loan, if possible.Hoyes also recommends exploring ways you can increase your income or reduce your expenses to free up cash flow, be that through extra shifts, a part-time job, a roommate or strict budgeting. Arbour said it’s also valuable to understand how and why you acquired these debts in the first place. “Is it because you’re running short every month and bridging the gaps?” she said. “Is it because your budget isn’t quite working for you?” This kind of reflection can help people avoid ending up in the same situation in the future. It can also help build the important habit of having a plan to pay off a debt when you take one on, she said. In the end, it doesn’t really matter which strategy you use, but more so that you have one to gain back control.“When you’re swimming in bills and payments, sometimes you can’t see the forest for the trees,” Arbour said. “But everybody loves a framework.” Dhriti Gupta is a Toronto-based general assignment reporter for the Star. Reach her via email: dgupta@thestar.ca
Across the country, people are starting to buckle under debt.
As of early 2023, Canadians owed about $1.85 in credit market debt for every dollar of disposable income — a combined outstanding debt of $2.32 trillion, according to TransUnion. This May, the Canada Mortgage and Housing Corporation reported that Canadian households have the highest debt-to-GDP ratio of any G7 country.
Number-wise, the only way to steer clear of debt is to spend less than you bring in, said Doug Hoyes, licensed insolvency trustee and co-founder of debt relief firm Hoyes Michalos. “But that’s not easy to do in practice,” he said. “Because if you live in Toronto, and rent is $2,000 a month, and your pay cheque is $2,500 a month, what are you supposed to do?”
While it can be difficult to keep debt in check when the cost of living is increasing, there are ways to get back on track, Hoyes said. Two common strategies recommended by financial experts are the “avalanche” and “snowball” approaches to paying down debt.
A debt avalanche prioritizes interest rates, while the debt snowball pays attention to balances. In both cases, you cover your minimum payments first. Where the extra cash goes is where the methods differ.
For instance, if you owe money on five different loans and credit cards, a debt avalanche dictates you devote extra funds to the highest-interest loan first. “Once that debt is paid, you roll your funds onto the next highest-interest rate loan,” said Anne Arbour, director of strategic partnerships at the Credit Counselling Society.
“With the snowball method, it’s the debt with the smallest balance that becomes the focus of your attention,” Arbour said, adding that you would continue by paying your loans in ascending order of balance.
Which method is best suited to you largely depends on personality, she said. “Analytical people might lean toward the debt avalanche method because in the long run … you’re going to save money,” Arbour explained. “With the debt snowball, there’s a bit more of a psychological win.”
“You get some instant gratification because you’re paying off a full balance sooner.”
Motivation is an important factor to consider when developing a debt strategy, Hoyes said. “We all know we should get up in the morning, and go for an hour-long run and floss our teeth three times a day … but we don’t do that,” he said. “You’ve got to do what’s actually going to work for you.” He noted that the psychology of the snowball method might be more appealing to those with a large number of debts to settle.
Beyond which method works best for your mindset, Hoyes said you should also consider the kinds of debts you have, and to whom you owe them.
“On payday loans, if you’re paying $15 on a $100 … how do you figure out the interest rate on that?” Hoyes said. He added that payday loans are often debts with both the highest interest and smallest balance — they would come first regardless of which method you use.
Another exception could be if you owe money to an organization like the Canada Revenue Agency. Even if the debt you owe the CRA has the lowest interest rate, you typically have to pay them as soon as possible, Hoyes said.
“All they send you is something that says you’ve got to pay us now,” he said, as opposed to a monthly credit card statement with a minimum payment. “Traditionally, the CRA is willing to accept payment plans where you pay over 12 months.”
If you crunch the numbers using either strategy and the time it would take to pay down all your debts is unrealistic, Hoyes said it’s better to accept that sooner rather than later, and seek out the help you need. “You’re better off at that point … filing a consumer proposal, or going bankrupt to officially eliminate the debt.”
To avoid getting to that point, Hoyes said it’s critical to try to eliminate the amount you’re able to borrow as you pay down your debts. Some strategies to accomplish this include lowering your credit limit, cancelling your credit card, or converting your card to a fixed-term loan, if possible.
Hoyes also recommends exploring ways you can increase your income or reduce your expenses to free up cash flow, be that through extra shifts, a part-time job, a roommate or strict budgeting.
Arbour said it’s also valuable to understand how and why you acquired these debts in the first place. “Is it because you’re running short every month and bridging the gaps?” she said. “Is it because your budget isn’t quite working for you?” This kind of reflection can help people avoid ending up in the same situation in the future.
It can also help build the important habit of having a plan to pay off a debt when you take one on, she said. In the end, it doesn’t really matter which strategy you use, but more so that you have one to gain back control.
“When you’re swimming in bills and payments, sometimes you can’t see the forest for the trees,” Arbour said. “But everybody loves a framework.”
Dhriti Gupta is a Toronto-based general assignment reporter for the Star. Reach her via email: dgupta@thestar.ca
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