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How credit card debt affects your credit rating

Credit card debt is what we call revolving debt, which means that credit cards revolve a balance from month to month. As a result, your interest rates are not predetermined and your monthly payments vary according to the amount you owe.  

In the case of revolving debt, it's important to make payments on time, because if you don't, your lending institution may report it to the credit bureaus, which can have a negative impact on your credit rating. This type of error can appear on your credit report for up to seven years.

To maintain a good credit rating, you need to keep your credit card balance as low as possible and pay your statements in full at the end of each month.

What's the most effective way to pay off credit card debt?

Once you're ready to pay off your credit card debt, the key is todraw up a repayment plan and stick to it. If you only have one debt, it will be easier to manage.

On the other hand, if you have several lines of credit, you need to analyze the details of each one, draw up a budget and determine which debt you need to pay off first. There are many strategies to help you pay off your debts faster, and the two most popular are the snowball effect and the avalanche method .

The snowball effect and the avalanche method: which is better?

The snowball effect and the avalanche method are useful strategies for paying off your debts. Both require you to list your debts and make minimum payments each month. So what's the difference between the two?

The snowball effect

The snowball effect involves paying off your debt in order from smallest to largest. When your smallest debt is paid off, you can start paying off the debt with the second-lowest balance, and so on.

Many people choose this method because it boosts motivation and dedication to debt repayment. You can celebrate small successes right from the start, giving you more willpower to pay off the rest of your debts.

As the name suggests, just like a snowball, the bigger it gets, the more snow it collects. The same principle applies here: each balance you pay off gives you more money to help you pay off the next one faster.

The snowball method can improve your credit rating more quickly, as it allows you to reduce the number of accounts with outstanding balances more quickly. The disadvantage of this method is that, since you don't take interest rates into account, you may find yourself paying high-interest debts over a longer period of time, and therefore incurring additional charges.

The avalanche method

The avalanche method involves paying off debts with the highest interest rates first. Many people trust this method, as it allows them to save hundreds of dollars on interest payments.

In fact, every time you pay off a debt, you free up more money that you can apply to the next debt with the highest interest rate. In this way, you can reduce the amount you'd otherwise have to pay, and shorten the time it takes to pay off your credit card debt. It may take some time before you see real results, but if you follow your repayment plan, you'll see your debt fall like an avalanche.

Overall, the best method is the one that best suits your personal needs. Both debt repayment methods can help you get out of debt and regain your financial freedom.

Which type of debt should be repaid first?

Again, this depends on your personal situation. However, it is generally advisable to repay the debt with the highest interest rate.

In many cases, this means prioritizing and paying off credit card debt, with interest rates as high as 30%, and personal loans, with interest rates as high as 36%, over student loans, which generally have lower interest rates.

If you have short-term payday or personal loans, you may want to give them priority, as deferred repayment could have dramatic consequences for your credit rating and even lead to greater indebtedness.

Get a free consultation with a licensed insolvency trustee

4 tips to reduce credit card debt

1. Analyze your budget

The first thing to do when you want to reduce your credit card debt is to start by analyzing your expenses and prioritizing them. This will help you identify where you spend your money.

Next, start reprioritizing your budget by determining where you can cut back on spending, then take the money you've freed up and use it to pay down your debt. Drawing up a new budget can be a great help in comparing your income to your expenses and finding out what's causing problems.

2. Pay more than the minimum

If you can afford it, try to pay more than the minimum required on your credit card. If you pay extra each month, you'll pay less interest overall and it will take less time to pay off your debt. The key is to be realistic and logical. This method can help you save money in the long run.

3. Negotiate lower rates

Many people don't know it, but it's possible to negotiate your credit card interest rates with your bank. So, if you're having trouble paying off your credit card, you can contact your bank and ask for a lower rate.

The bank will probably agree, as it has more to lose if you don't pay your debt. What's more, a good credit rating and a history of timely payments will work in your favor.

4. Use more cash

It's true that credit cards are an interesting tool, but only if they're used properly. So, if you're feeling overwhelmed by your credit card debts, you can stop using them and instead use cash to pay for your expenses (except in emergencies). Paying in cash will help you understand the difference between your needs and your wants, and ensure that you spend more consciously.

Debt solutions

Debt consolidation

When used correctly, debt consolidation loans are a great way to get out of debt. Consolidating your credit card debt with a personal loan or mortgage can help you get out of this unpleasant situation while improving your credit rating.

By consolidating your debts, you benefit from a number of advantages, such as lower monthly payments and possibly lower interest rates. However, for this to work, you need to be careful and adopt the right habits to avoid getting further into debt.

How do you consolidate debt?

Consumer proposal

A consumer proposal is a way to get out of debt and avoid the black mark of bankruptcy on your credit report, since it demonstrates a willingness to pay and regain control of your financial situation.

With the help of a trustee in bankruptcy, you can make a proposal to your bank or credit institution to repay a percentage of the amount owed to them, or to extend the period during which you must pay your debts.

Banks and financial institutions generally accept these proposals, as they allow them to repay a significant portion of a debt rather than lose it all if the person decides to file for bankruptcy. Depending on your financial situation, a consumer proposal can be an effective and reliable way of repaying your debt.

Personal bankruptcy

If you find yourself in a situation where you've tried everything, but nothing seems to work, a personal bankruptcy can offer you a fresh start. Declaring personal bankruptcy can be a long and expensive process, so be sure to consult a trustee in bankruptcy .

How do I declare bankruptcy in Quebec?

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