January 08, 2018
You have decided to undertake your debts and regain control of your finances. But are asking yourself where to start…
The general rule is to always start by reimbursing debts that cost us the most in interest rates.
We should then choose the ones with the lowest balance. Reimbursing small debts is faster therefore provides great means of encouragement.
While you are eliminating one debt after another, make sure that you:
- Keep up-to-date with all of your payments so as not to affect your credit report; and
- Do not increase the balance of your other debts.
As with any diet, you will have better results if you take it slowly but surely!
- You should always consider the possibility of consolidating your credit card debts with a credit line. Repaying $10,000 over 5 years on a credit card will cost you $8,000 in interest charges. However, if you repay it using your credit line, it will only cost you $2,000 in interest. An easy savings of $6,000, which may help you take a few trips!
- Reimbursing one debt only makes sense if you don’t increase the balance of your other debts in the meantime. We suggest placing your credit cards in a glass in your freezer. This way, if a sudden urge to use them takes over, you will have a good 24-hour period to think it through!
- Making the decision to reduce your debt level is the best mid- and long-term solution. However, it will be quite difficult in the short-term: 1) your credit card will no longer serve as a second source of income and 2) the amount that you set aside for repayment purposes will no longer be available for your personal expenses. It won’t be easy, but you will be proud of yourself and of your new financial flexibility once the process is complete.
This is most definitely a step in the right direction. Make sure you have great moral support for the difficult periods, because, as is the case with life in general, they will be inevitable.
How to do it
- Draw up a table showing your debts. Indicate balances, their interest rates and their monthly payments.
- Identify the ones where the interest rates are the highest. These are generally credit cards.
- Tackle the debt which has the lowest balance. Why? Because it will be easier to repay and you will be encouraged to continue.
- “Freeze” all your credit cards, as we suggested above!