Module 4: Dealing with debt

From: Financial Consumer Agency of Canada

Transcript

Dealing with Debt

Narrator: Dealing with Debt.

If you borrow money, borrow only what you can afford to pay back within a reasonable period of time. Managing your debt will help you feel more in control of your finances.

Like many Canadians, you may be carrying too much personal debt. Dealing with debt can often seem like an impossible task. When you decide to tackle your debt, it is important to have a plan that will help you. Let's get started.

We'll discuss the importance of paying off your bills every month, how to recognize debt danger signs,

and give tips on how to manage and eliminate your debt.

SMS conversation (on screen):

Hey Rach, cc bill came in today. Super stressed. It's way higher than I thought it would be!

Deb, pay it off! Pronto! It'll only get worse. Trust me... ;-p

What does your debt really cost YOU?*

Narrator: Part of managing your debt is understanding how you got there. When you made a purchase in the past, did you consider the trust cost of the item? If you could not pay for the purchase in cash, and needed to borrow money, the true cost was probably higher than the sticker price, because of the interest you paid.

Let's look at an example. Let's say you bought a $2,000 big screen TV on credit with an interest rate of 18%. In Scenario 1, you have a set monthly payment of $40. In Scenario 2, your set monthly payment is $100. In Scenario 3, you saved up for the purchase in advance, paid by credit card, and paid it off in full when your bill was received.

True Cost:

Scenario 1: $3,724.47

Scenario 2: $2,395.65

Narrator: In Scenario 1 and 2, you can see that the true cost of the TV is much more than the $2,000 price tag.

Time to pay it off:

Scenario 1: 7 years and 10 months

Scenario 2: 2 years

Narrator: And look at how long it would take to pay off your balance if you only paid $40 per month. Ask yourself if you would even have the TV in seven years and 10 months. While this example is specific to credit card debt, it isn't the only kind of debt people take on. There are other types of debt, such as student loans, mortgages, car loans, and lines of credit. Whatever type of debt you have, remember to pay as much as you can and as often as you can. Additional and frequent payments mean you'll pay off the debt sooner and pay less interest. Regular and on-time payments will also help you maintain a good credit history and credit score.

Government student loan

Narrator: Let's talk about student loans for a minute. Government student loans are interest-free while you are enrolled in post-secondary education. They are payable six months after you leave your studies, although be aware that interest is accumulated during that time. And they may entitle you to student loan tax credits.

If you're ready to pay back your government student loans, visit the CanLearn.ca website for more information and to access the loan repayment calculator. If you're having trouble paying back your student loan, you may be eligible for the Repayment Assistance Plan. The plan allows you to pay back what you can reasonably afford depending on your current situation. If you borrowed money from a financial institution to pay for your education, you must work with them directly to understand your repayment requirements.

SMS conversation (on screen):

Told myself I'd only use my credit card in case of emergency, but I can't stop using it for everyday things!

Use cash for stuff like that. It's hard at first, but if you only carry cash, you can only spend what you have on you.

Recognize the DANGER SIGNS*

Narrator: Be on the lookout for signs that you are having trouble with debt. How many of these signs match your behaviour?

Do you use your credit card as a necessity, or is it a convenience?

Do you take out cash advances on credit cards for your daily expenses?

Do you continually miss payments?

Are you near the limit or have you exceeded the limit on your credit cards?

Do you borrow from one credit card to pay off another?

If you answered yes to any of these questions, it may be time to get help managing your debt.

SMS conversation (on screen):

Using cash sounds like a good plan but what do I do with all the debt I already have! I am so stressed every time I get a bill. I am afraid to open them sometimes.

Don't panic! You just need a plan to conquer your debt.

Where do I even begin???

Take control of YOUR DEBT*

Narrator: There are many ways to take control of your debt. We'll review a few now.

Try using your savings to pay off your debt, especially if you're paying a higher interest rate on your debt than you are earning on your savings.

Pay down your highest interest rate debts first. By focusing on loans with the highest interest first, you will pay less in total interest costs, and you will be debt-free sooner.

Switch to less expensive cards. If you usually carry a balance on your credit card, you may benefit from switching to a lower interest rate card or one with no annual fees.

Call creditors to negotiate lower rates. A portion of your payment goes to paying down the principal, or amount you borrowed. The other portion goes toward your interest charges. If your interest rate is lowered, more of the payment could go toward the principal.

Set up automatic bill payments to stay on schedule with your payback plan and to avoid late payments.

Leave your credit cards at home, and bring cash to help you stick to your budget and avoid impulsive purchases.

Also, stay away from "buy now, pay later" offers. The administrative fees and high interest rates if you don't pay on time will only add to your debt burden.

SMS conversation (on screen):

I was deep in the hole until I started paying back as much as I could every month and really cut down on my spending. It's possible. You can do it too!

Ok, I'm going to cut up this card! Enough is enough! I feel more in control already. Thanks Rach!

Getting help with DEBT*

Narrator: You may decide to work with a third party to help you get out of debt. Depending on your debt load and your ability to make payments, there are several options to consider.

A debt consolidation loan will combine all your debts into a single loan. This leaves you with only one monthly payment to manage. If you get an interest rate that is lower than what you are currently paying to your creditors, it will reduce your overall interest costs. Speak to your financial institution to see if this is an option.

Remember, if you choose to consolidate, your debt is not gone; it is just combined into one larger debt. Here are some other options.

Credit counselling. A non-profit credit counselling agency will work with you to find the best way to pay off your money, often through a debt management program that is paid over several years.

Consumer proposal. You would work with a trustee in bankruptcy to prepare the proposal, which lets you reduce your debt and pay off the balance gradually. Payments to creditors are made through the trustee.

Bankruptcy. A trustee in bankruptcy will consolidate your assets to try to pay back your creditors. Remember, not all debts are discharged through bankruptcy.

For instance, students loans are not discharged until after seven years.

Trustees in bankruptcy are licenced by the Office of the Superintendent of Bankruptcy. All of these options will affect your credit history and credit score, some for several years.

Office of the Superintendant of Bankruptcy Canada: osb.ic.gc.ca

Narrator: Once you have taken action to conquer your debt, work at rebuilding your credit rating. It will take time, but it is worth it.

What did we LEARN?*

Narrator: Let's summarize what we learned. We discussed the true cost of debt and how to recognize if you have a problem with debt.

We reviewed steps you can take to manage and eliminate your debt, as well as available professional resources, should you need help. Deciding to tackle your debt can seem overwhelming. The first step is to make the decision to be debt-free. The next step is to identity a plan to get there. Keep a positive attitude. Small efforts now will bring big payoffs in the future.

I wish you financial success.

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