Are the bulk of your credit card or loan payments going towards interest? When faced with a daunting pile of debt, it can be such a defeating feeling watching your hard-earned money barely make a dent in what you owe, as the interest almost completely swallows your minimum monthly payment.
The reality is you’re not alone.
We all go through tough times and many of us are not prepared to sustain such long-lasting hits, as interest gradually accrues on your balance. Just look at how the COVID pandemic affected countless people in our communities and shook the financial stability of nations! As a result, Canadians now have an average of $1.73 debt for every dollar they earn.
Top 3 Simple Strategies to Reduce Your Interest Payments
Without a big payday to wipe the slate clean, making minimum payments is the very long road to financial freedom. Fortunately, not all hope is lost. Here are three strategies to help you pay less interest on your debts so you can get back on top of your finances sooner.
1/ Pay off all high interest debts first
If you are juggling several credits cards or loans, select the order in which you wish to pay off your debts, focusing on the highest interest ones first. If possible, transfer the balance of your higher interest debts to your lower interest ones. If you can afford a large down-payment, put it on your most high interest debt to knock it back. The key is to have the bulk of your payment go towards the principal balance of what you owe.
2/ Stay up to date on your payments
Life happens and bills can slip off the radar. If you’re not keeping regular track of your finances, due dates can seem to creep up and pass by. Unfortunately, late payment penalties add to your balance owing. For most credit cards, if you haven’t made a payment in 60 days, your interest rate will increase making it even more challenging to get caught up.
Your payment history makes up 35% of your credit score. Missing a payment for more than three months can mean losing points on your credit rating. Having a poor credit rating makes it increasingly hard to secure low interest loans in the future.
Avoid the high interest rate hamster wheel. Schedule payment reminders on your phone or set up an automated withdraw with your online banking and never miss another payment again. If you can occasionally manage to make more than one payment a month, even better.
3/ Consolidate your payments with a line of credit
Simplifying your finances with one monthly payment can also reduce the amount of interest you owe. Based on your income, debt level and credit rating, a financial institution may allow you to consolidate all your high-interest payments into a personal line of credit.
Like a credit card, your minimum monthly payments are based on the amount of the loan you use; however, unlike credit cards, lines of credit have lower and more negotiable interest rates.
Sinking into a cycle of high interest debt is not a fun ride to be on, but it doesn’t have to be forever. Start by making a list of your debts, balances owing, and their due dates, then take a deep breath. Breaking it down into small, manageable tasks will help you to confidently get back on top of the issue.
As they say, “How do you eat an elephant? One bite at a time.” You’ve got this.