Staring up from a gaping hole of debt and wondering how the heck to climb out is an overwhelming prospect. Not to mention the internal guilt that comes with continuing to spend when you know you’re not dealing with your debt.
Debt is the reality for many, and yet the concept is still seeped in confusion, fear and shame, pushing most of us to keep it hidden, or worse . . . ignored. And who can blame us? It’s not like they teach Money 101 in school.
But the truth is, you don’t need to be a financial genius to start tackling your debt. Sure, you’re not going to scale the gap to a debt-free existence in one superhuman leap, but you can form healthier habits now and chip away at your debt one day at a time.
So if you’re ready to start, let's get you acquainted with some simple debt-conquering tips.
Why it’s important to pay off your credit card
Paying off your credit card debt will prevent you from handing your hard-earned money over to the bank in interest, and also improve your financial health— which will make your financial future easier and cheaper.
One important measure of your financial health is your credit score. Your credit score is a number assigned to you that gives lenders (usually banks) an idea of how well you can pay back a loan. A higher score means it’ll be easier and cheaper to get a loan when needed. How do you achieve a high credit score? You guessed it. By paying off your debt.
If you dream of one day buying a house for you, your family and your cherished collection of succulents, you’ll probably need a mortgage. Or maybe you’ll need a loan one day to start your coconut gelato business or buy a car. If the powers-that-be see that you have a low credit score, that means they might question your ability to make monthly mortgage or loan payments, which means a more costly payment plan.
And even if taking out a business loan or applying for a mortgage is low on your list of priorities, there’s another very important reason why you should pay off your credit card: interest cost. When you don’t pay off your card, you’re being charged 20% on the balance, and it really adds up. The average Canadian spends around $550 on credit card interest annually. We’re not sure about you, but there are a lot more exciting things we could buy with $550 than, well ... nothing!
Give yourself a break and know that you’re in control of your debt
First up, you have to take a look at what you owe. Take a deep breath, and be gentle with yourself – it might be scary but you definitely have options. Having debt doesn’t make you a bad person. Whatever the tally, it’s just a number. And once you know it, you’re on the first step to taking control.
Start with the familiar debts that linger on the edges of your mind on a daily basis. Think credit cards, student loans, credit lines, mortgages. Get the numbers down on paper, along with their interest rates and payment schedules.
You did it! Now you have a number. And no matter what that number is, it’s not unconquerable. It’s time to realize that debt is not some self-governing villain hellbent on your destruction and tossing cleverly timed obstacles into your life.
You are in control. These are the kind of obstacles you have the power to move out of your own way. So grab your superhero cape of choice, and let’s get started on that now.
Pro-tip: You can run a free credit check on Borrowell to ensure you don’t have any lingering debts you’ve forgotten about. This report will list all open and closed debts you’ve had in the past 7 years and, since it’s a soft-check, you can do it as many times as you want without affecting your credit score.
Give your credit cards a rest
It may be obvious, but only because it really works! If you’re serious about tackling your debt, put your credit cards in a drawer and stop using them. At least until they’re paid off. If you leave the house with only cold hard cash (aka your debit or KOHO prepaid visa card - this isn’t 1990, guys), you are much less likely to overspend or make impulse purchases.
The average Canadian spends around $550 on credit card interest annually. There are a lot more exciting things we could buy with $550 than, well ... nothing!
Lots of cards incentivize spending with things like points or cash back. But have you ever asked yourself if your credit card rewards points are really worth adding more debt (plus interest!) to the sum you’re working so hard to decrease? Too often, the annual fee on your card (averaging $100 a year in Canada) and the interest you pay (remember that Canadian average of $550 a year?) costs more than the value of the rewards you earn. So try not to put more obstacles in your way when you’ve only just begun.
Check if you can lower your interest rates
Why not save a couple hundred bucks on interest if that’s a possibility? You can do some quick research to see if there are personal loans, balance-transfer credit cards, or lines of credit with lower interest rates that might be available to you. For example, if you’re able to consolidate all of your high-interest credit card debt onto a lower-interest credit line, it will prove quicker to pay down.
Forewarning: these loans can be hard to obtain if your credit score is low, so don’t panic if you can’t get one now. The purpose of this step is to make sure you are paying the lowest possible interest rates you can in this moment. You can always revisit debt consolidation down the road after you’ve made some progress on your debt.
Reality check your habits. How can you free up some of your money?
Now that you’ve acknowledged your debt, locked away your credit cards, and you’re paying as little interest as possible, it’s time for another reality check. Let’s get up close and personal with the question: where has all your money been going?
Have a look at your bank statements and split the spends from the last 2-3 months into two columns: “Necessary” and “Extras”. A piece of paper or a google spreadsheet will both work just fine. Your “Necessary” list should include your essential monthly spends. Think rent, groceries, transit, phone, and internet. Everything else should go under “Extras”. (And yes, that includes the specialty coffee you credit for making you a functioning human every morning.)
To be clear, we are not here to judge. And we’re definitely not telling you to ditch that specialty coffee or your frequently demonized avocado toast. Contrary to popular belief, you don’t have to give up all the things you love to reach your financial goals. But recognizing that some sacrifices will need to be made to make progress on your debt is vital to your success.
Have a look at your lists. Are there any items under “Necessary” that can make the humble move to “Extras?" And what about some “Extras” that can be shifted to the backburner for the time being? See if you can free up a couple hundred bucks with one change—like taking a break from Uber, or deleting the Foodora app from your phone.
Remember that you have the final call. And if you say that avocado toast makes the cut, well then, we’ll meet you for brunch next Sunday morning. But make a game plan for the things you do plan to change. If you’re giving up Foodora, make sure to add a weekly grocery shop into your schedule.
Make a budget that works for you
Taking the time to create a comprehensive picture of your finances will go along way to structuring your road to a debt-free existence. (Yes! That’s a thing that’s actually possible!) Our KOHO ultimate budget template (found at the bottom of this article) is a great place to start.
Once you have that budget in place, check back to see if that goal you made earlier is still realistic. If it’s not, change it.
Speaking of being realistic, in your budget, try not to make your monthly debt payments so large that you’ll be stretched really thin every month. You don’t want to discourage yourself and you definitely don’t want to put yourself into a position where you need to pull out your credit cards.
Start small for the first couple of months as you strengthen your budgeting muscles, and then move to higher debt payments as you start to understand what your budget will allow. Keeping the goals manageable is key, here.
Set a goal for when you want it all to be done
Once you have a solid picture of what it takes to conquer your debt, and a little practice with budgeting, you need a timeline. Setting a goal for when you’d like to be debt-free will help to keep you accountable and motivated to keep making those payments every time!
Celebrate small wins
Dream ahead to that moment when you reach your goal of paying off all your debt. Plan a celebration for yourself and add it into the calendar. Maybe it’s dinner with some friends, or a celebratory purchase of one of those “Extras” you diligently gave up while you focused on your debt. Whatever it is, make it something you will look forward to.
More importantly, make some time to celebrate the small wins - those milestones along the way that show just how much progress you’ve been making. Tackling your debt and being diligent enough to stick with it is a huge accomplishment, so make sure to give yourself a regular pat on the back. Celebrate 25% paid off, 50% paid off, and so on, to motivate you to keep your eyes on that prize!
Get your personal budget template!
See where your money is going and how much you can save.
Ashley McCallan is a People & Culture Generalist at KOHO. In her off-hours she’s a writer, obsessive budgeter, and nurses an unhealthy obsession with all things UK.