Which debts should be prioritized and paid off first

Debt prioritization has been on the mind of millions of Canadians lately. In fact, a study indicates that Canadians paid down $16.6 billion worth of credit card debt within the shutdown months due to the pandemic.

As the economy begins to reopen, many Canadian households may find themselves with lighter non-mortgage debt balances compared to the beginning of the pandemic.

However, despite this reduction, there is still $74 billion in recorded credit card debt as of January 2021.

Debt prioritization is critical when it comes to getting out of financial debt. This article will list down some important considerations when deciding which outstanding debt balance to pay first.

Installment Loans and Revolving Credit

While having no outstanding debt is good, having no credit history at all or having a low credit history can be counterproductive. Paying off one’s debt should simultaneously increase one’s credit score.

Installment loans and revolving credit are forms of credit that are considered good debt and can help improve one’s credit score.

• Installment Loans: These loans allow for staggered payments for items such as a home mortgage, car loan, or student loan. Instead of paying one-time, equal monthly payments are made over a set period.

Unlike payday loans and credit cards that can quickly spin out of control, an installment loan allows one to know how much they need to pay monthly and when the loan will be paid in full.

• Revolving Credit: Like credit cards or home equity credit, this form of credit provides an available balance one can repeatedly borrow from. This form of credit gives a set limit and allows the person to pay it back over time.

Debt Prioritization Tactics

Several debt prioritizations tactics can help decide which debts to pay off first.

• Interest Rate: This tactic prioritizes high-interest rate debts first. Mortgage and student loans will not be prioritized for this tactic, as these are low interest and are tax-deductible.

This tactic would instead prioritize the repayment of debts with higher interest rates and mortgages with penalties.

• Balance and Terms: This is the reverse of the previous tactic. This method allows for more psychological “wins” as the smaller debts which are easier to pay off are prioritized.

This is great to help keep one motivated to pay off debts. Credit consolidation loans allow different debts to be bundled together and make this method easier.

• Stress: This method prioritizes debt that brings about emotional and financial stress, such as a personal loan made to a family member or friend. While these loans may not have interest attached, they can cause emotional stress, making it ideal to prioritize them instead.

Emergency Funds

Besides paying off debt, it setting an emergency fund is vital to protect one against unforeseen expenses and unexpected events. This helps ensure that no additional obligation will be added to the existing balance in an emergency.

Conclusion

Although getting out of debt requires goal-setting and self-control, it is not impossible. In fact, more Canadians have been getting out of debt since the start of the pandemic and may come out of the shutdown months with lighter debt balances.

It all comes down to prioritizing the debts to pay off and setting goals to pay them off. There are also companies offering debt relief to help make this process easier.

There are debt consultants in Canada who offer solutions to get people out of debt. DebtHelpers.ca provides a range of debt solutions customized to fit one’s needs. Head on to our website to learn more!