on Yahoo!11 ways to slash your debt
1. Psych yourself up
"Begin with your brain," says financial coach Nancy Zimmerman. "What works for your personality? If you need to meet a goal quickly to feel successful, for example, there's what I call the fast-and-furious method. Make your minimum payments and also direct as much money as you can each month to one debt(preferably with the highest interest rate)until you get it paid off. This gives you a real 'woo hoo' sense of satisfaction. Then move on to the next bill."
2. Lower your interest rate
Negotiating a lower interest rate on your high-cost plastic is as simple as calling your credit-card company, says Lynnette Khalfani, a money coach and author of Zero Debt: The Ultimate Guide to Financial Freedom(Advantage World Press). "People think that interest rates are set in stone, but credit-card companies know it's a competitive marketplace, so they want to keep you as a customer," she says. "If you have a good history of paying at least the minimum on your cards every month, nine times out of 10 your rate will be lowered on the spot."
Call and politely say you've been a loyal customer for years, but the competition has offered you a better rate and can the company beat it? A new rate of 10 to 11 per cent is a reasonable expectation, but see how low you can go.(This worked for Khalfani herself: before she became a money coach, she had a jaw-dropping $100,000 in credit-card debt, despite a six-figure salary. She negotiated lower interest rates, tripled her monthly payments and cut back on spending, and wiped out the debt in three years.)
3. Refinance your house
Sabrina Sabo, a health-care aide in Stratford, Ont., got a handle on her payments by refinancing her mortgage. She and her husband went to their bank halfway through their five-year term and increased the amount they owed - but kept their interest rate at a decent 5.8 per cent. "With the extra money, we were able to pay down some of our debt(which consisted of student and car loans), and our mortgage payment went up by only $30 a week. Before, our non-mortgage debt payments had been $500 a month because of higher interest charges."
Make sure you shop around to get the best possible rate on your mortgage. Visit www.allcanadamortgage.com to find a mortgage broker in your area.
4. Take advantage of your credit rating
Talk to your financial institution about a personal line of credit. This means it will pre-approve you for a maximum amount you can borrow, and the interest rate will be substantially lower than the 18 per cent or so you're paying on your credit cards, explains Christine Van Cauwenberghe, director of tax and estate planning at the Investors Group in Winnipeg. Your rate will depend on your credit rating and your assets(with more assets, such as a house, you'll pay a lower rate). Use this cash to pay off your high-interest debt. You then repay a minimum amount each month but you can pay off more than the minimum at any time.
5. Start small
Get out of the minimum-payment trap by setting up automatic money transfers through online banking, suggests Jessica Ludgate, an engineer in Whitby, Ont. "Start by transferring an additional piddly $25 a week from your account to your credit card or student loan. You won't miss it, but it adds up to $1,300 a year. Then, as your debts decrease, increase the amount of the weekly transfers." In just three years, Ludgate and her husband zapped $7,500 in student loans and $5,000 in credit-card debt.
6. Think big
Nancy Nelson of northern Saskatchewan turned her love of wild berries into a successful business. In between farm chores, she started selling homemade preserves on eBay.ca and soon branched out to antiques, clothes and collectibles found on her yard-sale and auction jaunts. The profits went into a separate bank account. "Within a couple of years, I had earned enough to pay off our mortgage!" she says.
Hellen Koufakis of Toronto also set her sights on a higher cash flow when she was saddled with $12,000 in back rent and unpaid utility bills after her divorce. "I was a receptionist and was determined to find a better-paying job. I moved to a temp agency and landed a contract position, which led to a permanent job as an executive assistant. I now make almost twice as much as before and that income, combined with a budget that has become a habit, means I'm now doing marvellously well."
7. Make creative cuts
The old "tighten your belt" advice is true: start reducing your costs wherever you can. You'll be surprised at how quickly small cuts can make a big difference. "One of my clients paid off her debts almost a year ahead of schedule just by colouring her hair at home, rather than at the salon, and applying the savings to debt repayment," says Lori Bamber, Chatelaine's Ask an expert financial columnist.
Kathryn Anderson, a program administrator for a career centre in Vancouver, agrees. "When I tracked my expenses, I found I was buying a lot of groceries, but wasn't using them because I was eating out instead. Now I have a monthly food budget that I decide how to spend, and if it's a lot of restaurants and a few tuna sandwiches, it's ok as long as I stay within my budget. This way I don't feel deprived."
8. Get a loan(Yes, that's right, a loan!)
Toronto resident Sera Weiss got fed up with making only the minimum payment on her credit cards each month and living paycheque to paycheque, so she took action. First, she discussed her situation with her family, and her grandmother and aunt gave her a combined one-time-only cash Christmas gift to help her get out of the hole. Then she went to her bank and got a $5,000 loan with set payment terms and a repayment schedule at a substantially lower interest rate than her credit cards. "My bank really wanted me to open a line of credit instead, but I knew it would have been too easy to dip into, and I would have ended up further in debt. I needed to know I had to repay a certain amount each month for a limited amount of time." Now she's out of debt and lives within her means.
If you are employed, have a good credit rating and some form of collateral, you could probably qualify for a consolidation loan from your financial institution, says Bamber. "This is good for people in a tight, but not extreme, situation," she notes. "A consolidation loan is a bank loan you use to pay off your various debts, leaving you with one debt, generally at a better interest rate, and one monthly payment."
9. Dip into your RRSPs
Does the very idea make your hair stand on end? Guess what: RRSPs don't have to be sacred, especially if you have lots of unused contribution room. "If you're earning eight per cent interest on your RRSP assets and paying 18 per cent interest on your credit-card debt, the idea of saving for the future is a complete illusion," says Bamber. Crunch the numbers to see if it's worthwhile for you. Then, once you've paid off your debt, talk to your financial adviser about balancing your RRSP withdrawal with a low-interest RRSP loan(generally easy to qualify for)that can be used to reinvest, lower the amount of tax you pay and get you back on track.
10. Mine your savings
Freeing up non-RRSP investments can work well, too. A few years ago, Anderson invested a small inheritance from her grandmother. When she was stressed out by her line of credit and car payments, she cashed in $9,000 - everything but her RRSPs - to pay off part of her $25,000 debt and still minimize the tax hit. Before making the move, she talked to her financial adviser and was careful to pinpoint the investments that had the fewest early-withdrawal penalties and back-end-load fees.
11. Ask for forgiveness See if you qualify to have your student loan reduced or even eliminated. In B.C., students who graduated after December 2004 in fields including speech pathology, physiotherapy and audiology, and who are working with children in underserviced areas, may be able to get their provincial student loan "forgiven." That's right, no repayment required. Ditto for nursing, medical, midwifery and pharmacy students who graduated as of August 2002. Visit www.bcslservice bureau.com for details. Also, check out www. canlearn.ca and your provincial or territorial student-assistance centre for information on other programs, including interest relief and debt reduction.
Talk to a pro
If you need serious financial help, talk to an accredited credit counsellor. Credit-counselling agencies work with you and your creditors to resolve your debt. Many are non-profit, which means you pay little or nothing for the service. Ask your financial institution for recommendations or visit www.creditcounsellingcanada.ca to find an agency in your area.
Credit counsellors offer a debt-repayment or management service, says Margaret H. Johnson, president of Solutions Credit Counselling in Surrey, B.C. In a repayment program, the government-licensed counselling agency contacts the creditor on your behalf and offers to pay your debt over a fixed period of time, usually five years. In return, the interest stops accruing immediately. The downside is that your credit rating takes a nose-dive for two to three years after the debt is repaid, giving you an R7 rating(R1 is perfect and R9 is bankruptcy).
For Gloria Ciccale,* a retail employee in Charlottetown, credit counselling was the way to go. "Before, I was paying almost $700 a month in minimum payments," says Ciccale, who got behind on her payments - including payments on a loan with a staggering
33 per cent interest rate - after she separated from her partner. "Now I pay $132.50 every two weeks and will be debt-free in five years. I can't tell you what a relief it is. I can sleep at night now."
* Name and location have been changed.
First published in Chatelaine.com's January 2006 issue.
© Rogers Publishing Ltd.