Paying back your debt
Creating a budget
A budget is a financial plan that helps you manage your money. It helps you figure out how much money you get, spend and save.
Creating a budget is a key step in paying your debts.
It helps you:
- identify your debts
- balance your income with your savings and expenses
- prioritize debt repayment over unnecessary expenses
- track your progress
Identifying and assessing your debts
Assessing your debts is important to manage and repay them. Use your budget to understand what you owe.
Identify your debts
Your list of debts may include:
- loans like personal, car, payday and student loans, mortgages, loans from family and friend, buy now and pay later plans
- lines of credits like personal, student and home equity lines of credit
- credit cards
- other unpaid debts like:
- property taxes
- utility bills like phone, electricity and cable
- spousal and/or child support
For each debt, note the:
- total amount you owe
- minimum monthly payment
- interest rate
Check your credit report
Check your credit report to make sure it includes all your debts and is free of errors. You may get a free copy of your credit report online.
Learn more about getting your credit report and credit score.
Compare your monthly income to your monthly expenses
Use your budget to compare your monthly income to your monthly expenses. This shows how much money you can use for debt payments each month.
If your monthly expenses exceed your income, act now. Take steps to improve your situation when facing financial difficulties.
Learn more about managing your money in challenging times.
Reduce your expenses
You may be able to reduce some of your expenses. This will allow you to increase the amount you have to pay back your debt.
Choosing a debt repayment strategy
A clear repayment strategy may help you pay your debt more efficiently. It may also reduce the stress and uncertainty of managing multiple debts.
Choose a payment schedule
Set a reasonable and affordable payment schedule. This may help you maintain your progress without feeling overwhelmed.
The length of your payment schedule affects the total interest you’ll pay. If interest rates rise, your monthly payments may increase. Make sure you have some flexibility in your budget to account for increases in interest rates.
Learn how to manage your money when interest rates rise.
Your payment schedule needs to align with your monthly budget.
Consistently paying on time over a longer period may improve your credit score. Missing payments due to an aggressive payment schedule may harm your credit.
With a shorter payment schedule:
- you pay less interest but have higher monthly payments
- you might have difficulty keeping up with your payments
- it may seem impossible to continue to make your payments
With a longer payment schedule, your monthly payments will be lower but you’ll pay more interest. It may make payments more manageable. If your payment schedule is too long, you might lose your motivation because you won't see progress.
Decide which debts to pay off first
Deciding which debts you’ll pay first depends on your financial goals and motivation. There are 2 main strategies to determine which debts to pay first.
You may start with:
- debts with higher interest rates
- debts with the lowest balance
There are benefits for each strategy. With either strategy, you need to continue making the minimum payments on all your debts.
Before you chose a debt repayment strategy, consider paying off past due accounts first.
Past due accounts
If you don't pay on time, your account becomes past due. Companies call these past due accounts or accounts in arrears.
Paying them off quickly may prevent extra charges from accumulating.
Late payments harm your credit score. Paying off your past due accounts may help you protect or improve your credit. If your accounts remain past due for too long, your creditor may send them to a debt collector. This may lead to more severe consequences, including legal action.
Learn more about dealing with a debt collector.
Debts with higher interest rates
By paying off your debts with the highest interest first, you’ll pay less interest. This will help you be debt-free sooner.
To use this strategy, list your debts in order, from the highest interest rate to the lowest. Put money towards the debt with the highest interest rate.
Debts with the lowest balance
You may find it easier to start repaying your debt with the lowest balance.
You may see progress quickly, which may help you stay committed to your debt repayment plan. This can keep you motivated to maintain your goal to become debt-free. This strategy may cost you more over time.
To use this strategy, list your debts in order, from the lowest balance to the highest. Use any extra money to pay down the debt with the lowest balance.
Working with your creditors
Effectively managing debt may involve talking and negotiating with your creditors.
Financial institutions and other companies
Contact your creditors to discuss your financial situation. Your creditors are the financial institutions and companies you owe money to.
They may offer:
- a lower interest rate on your debt
- to extend your payments over a longer period to reduce your minimum monthly payment. This will cost you more in interest
- to consolidate your debts into 1 loan
Learn more about debt consolidation.
Family and friends
If you borrowed money from family or friends, talk to them about the amount you owe.
Commit to a payment schedule that works for both of you. You may create a written agreement that includes the amount and the payment schedule. Consider writing post-dated cheques or setting up automatic money transfers to follow your payment plan.
This will show your commitment to repaying them.
Closing your accounts
Once you pay a loan, line of credit or credit card, consider closing that account. Only keep what you need and can manage responsibly.
Consider keeping open the credit account you’ve had the longest. This helps you maintain a long-term credit history, which may improve your credit score.
Learn more about improving your credit history.
Related Links
What to consider before borrowing money
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