11 Ways To Reduce Debt (& Eliminate It)

Reviewed by
A Licensed Insolvency Trustee
on August 6th, 2021 01:08 pm

With a heavy debt burden, financial freedom may continue to elude you for years to come. Making efforts on your own is good. But if those efforts are not working well, here are the best proven ways to reduce debt in Canada. 

Beyond mere reduction, some of the strategies discussed here will also help you eliminate financial debt. 

In other words, the goal is to become debt free as soon as possible.

But just why is it important to start taking action towards reduction and elimination of your personal debt? From the biggest to the smallest debt, below are the strong reasons to think differently about your current financial situation. 

Benefits of Financial Debt Reduction 

#1: Start Saving Consistently 

It doesn’t matter how much money you earn, student loan debt and credit card debt can limit your ability to save money. You already know that saving money will increase your ability to accomplish certain things. 

For example, you may want to buy your dream car or a new home; someday I guess. 

But if your debt payments take a large chunk of what you earn, you will not have the ability to save money towards such lofty goals. My question is, how long do you want to keep dreaming about these specific goals? 

#2: Take Advantage of Investment Opportunities 

One interesting thing that rich people and everyone else have in common is that a good number of investment opportunities are available to everyone. But when you can’t spend money towards taking advantage of investment opportunities, you’ll be stuck in the same financial situation for a long time to come. 

We all know that saving and investing are proven ways to earn more money. But if you are struggling to get out of debt, you won’t have the ability to do any of those things. 

#3: Increased Peace of Mind

For millions of Canadians, lack of money is a leading cause of chronic stress. Unfortunately, when you borrow money to meet up with some financial responsibilities including debt repayment, your stress levels will always be on the high side. 

That’s a recipe for decreased peace of mind. Just think about how you feel whenever you get a call or notification from your creditors and their collection agents. Can you see how getting out of multiple debts will result in increased peace of mind? 

Best Debt Elimination Strategies Proven To Work Every Time

Do you have some financial goals you want to achieve? I know your answer is yes. Below are some of the best proven ways to reduce all your debts and start saving money towards those specific goals. 

#1: Take Stock of Your Spending Habits 

The way you spend your money will always affect the ability to pay off debt. Perhaps, if your spending habits are not 100% within your control, you’ll continue to drown in debts with high and low interest payments for a long time to come. 

For example, if you are constantly spending on autopilot, your ability to save money will be significantly limited. 

Now you are serious about discovering how to get out of debt fast, here is one important action you need to take. Take stock of your spending habits. Think about the repetitive spending habits that consume big chunks of what you earn from your work or business. You can do that in the following ways. 

  • Gett Credit Card Statements – you may engage your credit card issuers to give you monthly or even annual statements. Use this to uncover how you are constantly spending your money. 
  • Use Habit Tracking Apps – use apps like Habitify, Strides or Beeminder to track your daily spending habits

From here you can start saving extra money to pay off debt fast. 

#2: Commit To Credit Counselling 

One of the best ways to eliminate debt with a high interest rate is to hire a financial advisor who will provide consistent credit counselling. Just like you go to a doctor when you are sick, these experts can provide affordable personal finance solutions proven to work for people with bad credit history. 

Sometimes, you’ll discover that some of these experts who provide free credit counseling worked for the same financial institution or credit card company you are dealing with. 

That unique experience gives them great insights on how to eliminate debt faster. Among other things, they can help you create faster debt payments plans. 

#3: Improve Your Budgeting Skills 

If you don’t have strong budgeting skills, you may lose control of your credit card spending habits. Here is one specific example of improvement that a credit counsellor can help you to make. 

Without a budget, there is always a tendency to spend your money in a way that negatively affects your ability to reduce your debt. 

With better budgeting skills, you’ll gain increased control of how your  cash flow works for you instead of drowning you in expensive debt and lower credit rating. Since you are using your smartphone on a daily basis, it might be helpful to explore some of the best budgeting apps in the marketplace. 

#4: Create Automatic Savings Plan

Modern technology is now making a lot of amazing things possible. Automatic savings plan is just one of them. 

In the United States for example, Forbes reported that around $5.6 billion was saved using some modern applications like Stash. With some of these tools, you can increase your ability to save more money to reduce your debt. But what is an automatic savings plan?

It is a bank transfer order to move a certain amount of money from one particular account (current) to a savings account on a specified date. If you are a regular salary earner, this is one of the best ways to save extra money. 

Based on the fact that our brains often do a poor job of remembering what is important, the cognitive burden of deciding whether to save or not is now taken away by these automatic apps. 

#5: Cut Down Your Expenses 

Inside one of Madonna’s songs titled Frozen, there is a particular line that reads like ‘you only see what your eyes want to see’. In some sense, that also means you can only see what you look for. Without looking for a specific kind of thing, you’ll never see it or even know where to check. 

The same thing applies when it comes to finding ways to cut down expenses so you’ll have more money to spend towards your quest to get out of debt. Without pausing to look for ways to cut down expenses, you’ll hardly see it. 

So where exactly do you look?

  • Entertainment related subscriptions
  • Software products you hardly use very often 
  • Unintended and frequent purchase of alcohol 
  • Daily consumption of electricity 
  • Renegotiation of debt settlement with lower interest rate
  • Eating more at home

These are some of the ways to save extra money so you can begin to reduce your debt as fast as possible. 

#6: Get A Debt Consolidation Loan 

Getting a consolidation loan when your credit limit is already stretched may sound counter intuitive. However, if you are unable to save some extra money needed to get out of debt faster, this might be the best option within your reach. Whether you are struggling with student loans or personal loans, this option could help you clear all your debts in a surprisingly short time. Assuming you have not thought about this option, there are so many benefits of debt consolidation loan worth exploring. Pause here and think about the following points below. 

  • Have all your debts streamlined into one monthly payment 
  • Lower interest rate on your credit card debts
  • Get out of debt faster with lower stress level
  • Make consistent improvement of your credit score 
  • With an unsecured debt consolidation loan no asset will be at risk

If you have been wondering what a debt consolidation loan is, these are the potential benefits you may experience by getting it. However, it is important to engage a credit counsellor to help you navigate through the best terms, low interest rates and minimum monthly payment. 

#7: Use The Debt Snowball Method

What is the debt snowball method? 

It is a debt settlement strategy of listing and paying off debts from the smallest ones while making minimum monthly payment on the bigger ones. The idea is that getting started with the smallest ones will build the momentum needed to become debt free in a short time. 

Just think about it for a while. If you have different sizes of student loans and personal loans, how do you feel when you think about the biggest ones with the highest interest rate? Maybe demoralized. 

And that’s how it’s easy to ignore the smaller credit card debts you might be capable of paying off at the moment. 

Without overstretching your credit limit, this method can help you get out of debt faster than you thought possible. This is based on the proven power of momentum. Interestingly, you might be able to start a monthly minimum payment that will have a positive effect on your credit score. 

#8: Use The Debt Avalanche Method 

Here is another debt reduction method that can get you started with your smallest balance while improving your credit scores. It is a repayment method of allocating minimum payments to all types of debt while remaining some funds for debts with the highest interest rate. 

One of the key benefits of the debt avalanche method is that it reduces interest rate while keeping you on the track to become debt free. 

For example, if you have car loans to deal with and your credit reports are not looking bright, you can start with the minimum balance in your bank account. You just need to work out the percentage in a way that accommodates other debts. 

#:9 Consumer Proposals 

When your credit scores aren’t looking nice but you are serious about becoming debt-free, consumer proposals are another great option proven to work for Canadians. It doesn’t matter whether you are struggling with a tyrant financial institution, high interest rate or overwhelming personal loan, consumer proposals are worth exploring. 

Before you get into the next debt with overwhelming monthly payments, here is how consumer proposals work. 

As one of the best alternatives to bankruptcy, a consumer proposal is a legal process of consolidating your personal loan or credit card debt so that you’ll have reduced minimum payments. 

When you are facing high interest rates and a bad credit score, filing a consumer proposal might help you negotiate lower monthly payments required to pay off your credit card debt and other loans. 

The key benefit is that you can have lots of debts with high-interest fees renegotiated while improving your credit score. This process is usually overseen by a licensed insolvency trustee in order to ensure a fair deal for creditors and debtors. 

In Canada, a consumer proposal is one of the best ways to settle debts without having to earn extra cash. 

#10: Create An Additional Source of Income 

Contrary to what many people think, creating an additional source of income may not require expensive training courses and huge amounts of money. Depending on your current situation, you may want to explore your available credit line to finance the creation of an additional source of income. 

The other interesting fact is that some types of income-generating activities may not require 100% active work engagement at all times. You can put your money to work for you in some cases. 

Hence, passive income generation helps a lot of people deal with the debts that have highest interest rates. Want to improve your credit score? Check out these sources below. 

Best Sources of Passive Income. 

  • Property rent (Airbnb or equipment)
  • Affiliate marketing 
  • Royalties (explore Amazon Kindle Publishing)
  • Create and sell digital products
  • Buying and selling profitable websites 
  • Youtube Adsense monetization 
  • Starting a local car wash
  • Dividend stock investments 
  • Real Estate Investment Trust (REIT)
  • Peer to Peer lending 

Depending on your chosen option, some of these passive income sources might give you the opportunity to work from anywhere, including your home. While getting started on the journey is usually hard, persistence and guidance from experienced professionals can help to get you there. 

Fortunately, when you have 1 – 3 additional sources established, you can then begin to experience the amazing benefits of passive income. With the extra cash that comes from your new sources, it will become easier to pay off the credit card debts with the highest interest rates. 

#11: Mortgage Refinance 

Though it may appear like taking on more debt, mortgage refinancing is a proven way to increase the capacity for paying off debts. Assuming you have an overwhelming personal loan but you have a home mortgage, this could be an option worth exploring. 

What is mortgage refinancing? 

It is a process of taking a new loan to pay off the existing mortgage loan on your home in order to get extra money you can spend on other things. It is about taking a loan based on your home’s equity and available lower interest rates. 

From this source, you can get some money to take care of your credit card balance. Instead of struggling with credit card debt obligations that have high interest rates on the monthly payments, mortgage refinancing can help you get on a financial path different from where you are now. 

Benefits of Mortgage Refinance

  • Lower monthly payments 
  • Lower interest rate 
  • Better cost management 
  • Longer payment terms 
  • Get an extra cash 
  • Consolidate your loans into one debt 

While it is easy to take mortgage refinance loans in some places, this is something you don’t have to rush into. Assuming you do some further research into this, it is very easy to find some mortgage refinance risks that may lead to some other undesirable financial outcomes. 

Do not overstretch your credit limits that will increase your debt balances. If you consider this an acceptable debt relief strategy, don’t forget to engage a financial advisor to guide you through the options and processes. 

Best Ways To Eliminate Debt In Canada: The FAQs 

How do I stop unnecessary spending?

The way we spend our money has a lot to do with our financial health, as individuals and households. You know it’s holding you back. And now you are asking, how do I stop unnecessary spending? Your habit is the main problem. Below are some actions you can take to make improvements. 

How to stop overspending

  1. Make a shopping list before going into an online of offline store
  2. Identify unnecessary spending patterns in your life
  3. Learn to rethink what is important and what is not 
  4. Explore the benefits of using a budgeting app
  5. Start saving consistently for investment 
  6. Learn to say no to certain offers and invitations 

How much does credit counselling cost?

Taking on debt through different credit cards is very easy to do. But when the habit gets out of hand, it may be hard for you to handle alone. This is when credit counselling services will become important. But then, you don’t have to wait until the situation becomes worse. Bear in mind that most expert credit counsellors will charge between $25 and $100 per month. 

Why is personal budgeting important?

Whether you have a small balance in your credit card or bank account, the benefits of personal budgeting is not something you should continue to overlook. Done very well, personal budgeting can help you control your spending and redirect your cash flow instead of living on autopilot. 

By achieving these benefits of personal budgeting mentioned above, you’ll become empowered to live life on your terms. 

What are two ways to take advantage of an automatic saving plan? 

The first is to set up an automatic transfer from your personal checking to a special savings account. Based on the app or service provider you are using, you’ll be able to define the amount, transfer intervals and when to access the funds. 

Secondly, you may want to negotiate with your employer to have a percentage of your paycheck automatically transferred into a savings account. Again, you’ll be able to set the terms of the automatic savings plan. 

How do I stop overspending?

Many factors are responsible for your overspending habits. Unfortunately, if you are not aware of these factors, it will be harder to control your overspending patterns. Perhaps, this is why a lot of people are stuck in credit card debt. Below are some of the things you can do to stop overspending your limited resources. 

  • Start tracking where your money is going 
  • Request for a professional financial health check
  • Avoid buying things that increases your credit card balance 
  • Make a shopping list before getting into an online store
  • Download a budgeting app
  • Start making daily, weekly or monthly budgets 
  • Try to reduce credit card spending 
  • Identify unintended purchase patterns and learnt to say no 

What are the risks of debt consolidation? 

Debt consolidation might seem like the best considerable option when you are in a dire financial situation. But then, this option usually has some downsides you may want to think through very well before you commit to it. Some of the major debt consolidation risks may include the following. 

First, you may lose the collateral (home) staked for the debt consolidation loan. Secondly, you’ll be paying high professional fees. And thirdly, your credit card score might be damaged at the end of the day. 

These are the major risks to watch out for when you are interested in getting a debt consolidation loan in Canada. Meanwhile, it is important to consult a financial advisor when you are ready for the deal. 

Who qualifies for a consumer proposal?

While consumer proposal qualification criteria often differ from one country to the other, these are the major factors to take into account before you can file for this debt relief option. 

The debt you owe must not be more than $250,000. You must be 18 years and above. Thirdly, there must be an obvious inability to pay off your unsecured debt within a reasonable amount of time. This is where an insolvency trustee comes into the picture. 

How can a beginner make passive income? 

Creating extra sources of passive income can increase your monthly earnings. With that increase, you’ll have greater ability to pay off your credit card debt and other types of debt. Interestingly, contained in this post are some proven ways to create passive income even as a beginner. 

Conclusion

At the beginning, you may be tempted by minimum payment plans and low-interest rates. However, it is a known fact that some types of debt are good while some others are classified as bad debt. But then, being in good or bad debt isn’t just the issue. 

The challenge is finding feasible ways to get out of debt in Canada. Though the situation might be overwhelming, one obvious thing is that you need to take action. Where do you start? Right from this inside this post, you now have great options on how to eliminate debt and improve your credit score. 

Most importantly, be sure to engage a financial advisor or credit counselling expert before you commit to any offer. 

From there, you can find the right path to regain your peace of mind while staying on a better financial path.