When Should you Try to Pay Down Debt?


That is a question that seems to come up a lot so I figure I’d help folks out with some scenarios and when it might be a good time to start thinking about paying down debt, or trying to eliminate debt completely. When should we think about paying down debt? Here are some simple examples of when you should think about paying down debt:

You are using Pay Day Loans

OK, so you have got yourself into a hard place for some reason (although the ads that are out now with the person justifying their use of these services are a bit disconcerting), so now would be an excellent time to put together a plan to get rid of your debts, or maybe you should talk to a Credit Councillor of some kind (there are many not for profit folks out there). This is absolutely time when you should think about your debts, whether you can pay them off, and if you can, start paying them off.

You are carrying Commercial Debt on your Credit Cards

Your credit card is a bad place to be carrying debt, given the rates many charge (especially if they are commercial cards like the HSBC Card, or the Sears card or the like) are really crazy. Figure out why you have all this debt on your credit card, and put together a plan to pay off this debt as soon as possible, this is an excellent time to pay off debt.

Your HELOC is Bulging

That Home Equity Line of Credit was so you could finish your kitchen off, but then it was a good place to put all your credit card debt, because the rate is that much lower, and well you wanted a nice vacation this year, but didn’t quite have enough for it, and now the HELOC is a headache, this is a good indication that you should start paying down your debts. The HELOC can be called whenever the bank wants, so paying it off quicker than the bank is asking you would be a good idea. Another superb time to start paying down your debts.

You only put 5% Down on Your Mortgage

If you still have a very large principle on your Mortgage outstanding, investigate whether starting to pay Bi-Weekly or what rules your mortgage has that allows for over payment. Putting money on your principle early on in your Mortgage is a great investment in your future, as it can either shorten your mortgage period or lower your payments later on in the mortgage. Another great time to start paying down debts.

You have Student Loans

Not sure what the rules are about student loan pay back, I believe the payments have some tax implication (I am about to find out, so please feel free to enlighten me on this one), but maybe figure out if you can pay this debt off faster, it’s never good to have something like this hanging around given the job market these days and such. I would say this would be an ideal time to pay down your debt.

You owe your Uncle Fred Money

Your Uncle Fred loaned you some money when you were just getting started to pay for new tires on your car, but he never really asked for the money back. Uncle Fred is a nice guy, but do you feel right owing him money? Just for family harmony and your own self-esteem this would be a good place to pay your Uncle Back.

You are in Debt

Remember what Debt Free really means? Have you seen an ongoing thematic premise in my situations here. If you are in debt, now would be a very good time to think about paying that debt off, and putting together a plan together so you can end up debt free.

If you are Debt Free, then you can start planning how to save, but since you are Debt Free, I am sure you can plan that without too much prodding by me.

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  • Don Antle September 25, 2012, 5:58 PM

    We see Canadians stretched beyond the limit every day. One of the worst problems derives from store credit cards, which can run over 30% all in. These cards have been created to keep people in debt for the long term.

    If you find yourself using store credit, at 30%, you’re probably beyond your spending limit, and should start paying down debt rather than make another purchase, even though the “no interest, no payments” option seems attractive.

    Reply
  • John September 21, 2012, 8:10 PM

    Many of these are great times to pay off debt! Thanks for the article! I’d recommend people to pay off non-mortgage debt after they have $1,000 saved in the bank. Then, they should pay off their house only if they have build up a fully funded emergency fund, are investing for retirement, and saving for their children’s education (if they have children).

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