Detox Your Debt

Credit card bills. Car payments. Student loans. When the bills just seem to keep growing and they’re causing stress and anxiety, it’s time for a debt detox.

Just as there are detoxes that can improve your physical health and some that may be harmful, the same is true for detoxifying your finances. It’s important to know the difference between fact and hype.

Financial hype

Payday loans are one of the most expensive ways to borrow money. Along with high interest rates, payday companies charge numerous fees. Depending on provincial regulations, payday loans will charge up to $93 on a 14-day loan of $300. Annual percentage rates of interest can reach over 800 percent.

Some people take cash advances on credit cards to tide them over with bill payments. Since card interest rates average 18 percent, only rely on a cash advance if you know you can pay off the balance by the end of the month—otherwise it will only add to your debt load.

Financial fact

If you have several credit cards with balances, you may be able to reduce your payments by consolidating these on one card with the lowest interest rate. Then cancel the other cards so you aren’t tempted to add more debt.

A line of credit from a financial institution allows you to withdraw money as you need it, up to a maximum amount. Some people use credit lines to pay off higher interest debts. You are charged interest from the day you withdraw money until you pay the funds back in full. This rate can fluctuate, so be careful about the amount you must pay back.

Debt consolidation loans from financial institutions are another way to reduce credit payments. The interest rate is often lower than credit card consolidation, but you may be required to provide collateral, such as your house, to secure the loan. Be sure you can afford the loan payments—or you risk losing your assets.

Financial recovery

A debt management plan may help if you can afford to pay all of your debts but need extra time or a lower interest rate. You sign a contract with a credit counsellor or debt management consultant who negotiates with creditors to reduce interest and fees and/or extend debt repayment periods.

This allows you to make one monthly payment at a set interest rate to the counsellor/consultant who then pays your debtors. Fees for debt management plans are not regulated and can vary widely, so be sure you know exactly what you must pay before signing a contract.

If you owe more than $5,000 and simply cannot repay all of it, a consumer proposal might be a solution. This is a legally binding agreement to repay creditors a portion of the total amount you owe.

A trustee in bankruptcy, who is licensed by the federal government, develops a proposal offering creditors a series of payments over a period of up to five years, based on your ability to pay. If the proposal is accepted, you make payments to the trustee, who pays your creditors.

If you’re unsure which detox regimen would work best, find a trustee in the yellow pages and ask for a free consultation to recommend the most appropriate solution.

Most important, beware of financial detoxes promising quick fixes; they can be dangerous. Instead, focus on developing healthy money habits. A household budget, for example, is the most effective way to prevent toxic debt. You can download a budget worksheet from Canada’s Office of Consumer Affairs (consumer.ic.gc.ca).

Begin a safe detox therapy today and your finances will soon be radiantly healthy.

Savvy saving

Avoid those daily designer coffees at $3 apiece. Make your own coffee and save over $800 a year! Save even more by taking lunch to work instead of eating out. Bringing your own lunch can save an additional $2,500 or more over the course of a year.

• When you head to the store, leave credit cards at home; bring cash so you know exactly what you spend. If you use your debit card, be aware of any extra fees.
• Reduce last-minute convenience food purchases. Plan menus and shop for the week using a list. Make use of coupons and buy bulk and sale items.
• Put extra loonies and toonies into a jar every day and deposit them weekly into a savings account.
• Create a household budget and stick to it. Savings potential: huge!