By Alyssa Furtado, RateHub.ca
Special to the Financial Independence Hub
Credit-card debt can be debilitating.
Because of high interest rates, once you find yourself in the hole, it seems almost impossible to pay down your debt. Not only will this debt put a damper on any future plans of saving for a home or even a vacation, it also negatively impacts your credit score, which will make the idea of owning a home even more difficult to imagine.
If you eventually want to own a home or go on a vacation that doesn’t add to your debt, employ one of the strategies below to start your journey on becoming debt-free.
Consolidate your debt
If you have debt on multiple credit cards, you should consolidate it into one place. You can either consolidate everything onto a balance transfer credit card or apply for a personal loan/line of credit with either the bank or a peer-to-peer lending company, like Grow.
Banks designed balance transfer cards to attract new business. They do this by offering promotional balance transfer interest rates (for example, the MBNA Platinum Plus MasterCard offers a 0% interest rate on balance transfers for 12 months) to those willing to transfer their debt with a different creditor to them. If you decide to go this route, it’s imperative that you understand the terms, fees and the promotional period. If you’re not careful, you can end up in a worse position.
The big advantage to this strategy is the ability to minimize or even completely eliminate (for a limited time) interest charges. Therefore, your payments will actually reduce your debt because your interest charges won’t be as high.
If crossing things off a to-do list motivates you to keep working hard, this strategy will work well for you. The idea behind this method is to prioritize the debts you pay off first, starting with your smallest debt and working your way up. Therefore, you’ll want to make the largest payments on your smallest debt, while making only the minimum payment on all your other debts. You’ll continue this process until you’re debt-free.
The main advantage to the debt-snowball strategy is the psychological benefit of seeing results more quickly than you would with other methods. Because you’re focusing on paying off smaller debts first, you can cross off creditors owed much quicker than you would if you decided to tackle your largest debt.
Pay high-interest debt first
This method focuses on quickly minimizing your interest payments. In this strategy, you want to prioritize how you pay off your debts by highest to lowest in terms of interest rates. Therefore, your largest payments will go towards your debt with the highest interest and then you’ll only make the monthly minimum payment on other debts. Once you pay off the first debt, you move on to the debt with the next highest interest rate and continue this until you’re debt-free.
The big draw to this strategy is that you’ll get out of debt quickly since you’re tackling debts with the highest interest rates first and pay less interest over the long run.
Alyssa Furtado is a passionate entrepreneur, financial expert, digital marketer and educator and founder of RateHub.ca, a website that compares Canadian mortgage rates, credit card deals, deposit rates and insurance. Its goal is to empower Canadians to search smarter and save money.