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Credit card debt is at an all time high amid inflation. Here's how to manage it.
Rounding it up
It’s hard to manage debt if you don’t have a lot of extra money to spare, but it’s important to lower your debt load as much as possible to maintain your credit score and make room to prioritize other financial goals.
To pay it down faster, one option is to increase your income by finding a side hustle that matches your skills, experience, and education.
You can also help reduce your credit card debt by transferring the balance onto a 0% balance transfer card, tracking your spending through a budgeting app, and strategically making cuts to your budget.
With rising interest rates and sticky inflation making most things less affordable, it’s not surprising that many Canadians are leaning on credit cards to make ends meet. According to a recent Equifax consumer survey, Canadians held an average credit card balance of $2,121 at the end of September 2022 – a record high.
According to Equifax, credit card usage is hitting “historic highs” and credit card utilization has increased steadily for a year and a half. Given that inflation has been persistently higher than usual over the last few months, many people may be leaning on credit to pay for groceries, bills, or unexpected expenses.
In this environment, managing credit card debt seems tougher than ever. But if you’re looking to cut down your debt, here are some tips to make it more manageable.
Credit card debt is particularly insidious because credit cards make it easy and convenient to use credit when you don’t have cash – just whip out your card to make a purchase whenever needed. And because credit cards have higher interest rates compared to other products like personal loans, it’s easy for debt to start piling up if you’re struggling to pay off the balance in full every month.
The first step to managing your credit card debt is to find out exactly how much you owe, the minimum monthly payment, and the interest rate to see what you’re dealing with. If you can, try to make at least the minimum payment each month to keep your credit score up and your account in good standing.
If you’re carrying a balance on your credit card every month, consider transferring your debt to a balance transfer credit card. This type of credit card allows you to transfer existing debt from another credit card and offers a 0% introductory interest rate for the first 12-18 months so you can work on paying off your debt without worrying about accruing more interest.
Just make sure you have a plan to pay off the balance before the introductory rate expires, because the card’s interest rate will go up. Note that balance transfer credit cards typically charge a balance transfer fee, usually around 1% of the amount transferred.
If you have an excellent credit score, you can also look into whether a personal loan would have a lower interest rate than your current credit card. If you have debts spread across multiple credit cards, paying them all of at once and then making a single monthly payment toward repaying the loan might be easier.
Increasing your income
It’s incredibly hard to get out of debt if you don’t have the money to put toward your debt in the first place.
One of the most effective ways to get out of debt is by increasing your income through a side hustle. Of course, the time you can commit and amount of money you make depends on your individual circumstances. It may be difficult if you have kids or are already working a full-time job – and you definitely don’t want to burn yourself out or neglect your personal obligations – but there are many side hustles that can fit with the schedule you already have.
Think about how you can use your skills, education, and qualifications to make extra cash. Whether it’s retail, bartending, grocery or food delivery, seasonal work, babysitting, dog walking, pet sitting, tutoring, selling items online or taking on freelance work related to your specialized field such as teaching music lessons, freelance writing or graphic design – make a list of potential clients and start networking.
Tracking your spending
When you’re trying to manage your credit card debt, it’s important to know where every dollar is going. Build a budget by finding a method that works for you, whether it’s a budgeting app, spreadsheet, or simple pen and paper to track your spending.
Once your debt is gone, or at least at a more manageable level, it’s important to have a healthy relationship with credit and to use it responsibly. If you’re concerned about relapsing and falling further into credit card debt, consider using KOHO. KOHO is a free spending and savings account that comes with a reloadable prepaid Mastercard. It works exactly like a credit card but, because it’s prepaid, it draws from funds you deposit. But unlike a debit card, you’ll earn cash back on all your purchases.
KOHO also works as a great budgeting tool, with an app that includes budgeting and goal tracking, plus real-time spending insights, and balance updates after each purchase. Since you can only spend what’s in your account, KOHO helps you manage your spending while avoiding credit card interest.
Inflation has driven up the prices of many goods and services this year. Unfortunately, there isn’t much the average person can do to change the greater forces of the economy. And if you’re still making the same amount of money as you did before inflation started rising, you may need to make cuts to your grocery or gas budget in order to save money.
As you track your spending, be honest and realistic about whether you can actually cut things from your budget. For example, you might have certain household expenses that are non-negotiable, but this might be the year of homemade birthday and holiday gifts, or only eating out at restaurants as the occasional treat.
While the savings that may come from these cuts may seem miniscule, each dollar you’re saving is an extra dollar you can put towards your debt. And if you get any extra cash from things like your annual tax return or a birthday gift, don’t let it sit in your bank account where it’s likely to be spent – put any windfalls you receive in a savings or investing account or use it toward paying off debt.
As your debt starts shrinking, it’s also important to remember that any budget cuts and sacrifices you make during tough times hopefully won’t be needed forever. Besides there’s a good possibility you’ll be making more money in the future – and if you can get a handle on your debt, you’ll also be debt-free.
As affordability continues to be a real concern for many Canadians, having credit card debt isn’t necessarily an indication of how good you are with money. Getting out of debt is hard work, especially at times when money is tight; but it’s worth it to find a debt repayment method that works for you and to slowly push yourself toward financial freedom.
Jane Switzer is a writer and editor with more than a decade of experience producing content for major Canadian newspapers, magazines, fintech companies and banks. Jane got her start working in journalism as a reporter and copy editor before transitioning to content writing, editing and SEO.