Debt Reduction
There are many reasons to work on reducing your debts, if you have any. Here are a few that come to mind:
- reduce your interest payments
- free up money for other purposes besides increasing your creditors' profits
- reduce the potential for default should your income decrease in the future
- protect collateral from the threat of foreclosure or repossession
- establish or maintain a good credit rating (important even for some jobs today)
- protect the interests of cosigners who are not in a position to take over payments
- avoid collection activities and threats of legal action
- gain control of your finances back from your creditors
- minimize the financial stress of having debt obligations that you can't pay
Below is a place to list any debts that you might have, as well as some important information which will help you
to focus on which ones to pay off first. "Collateral or Cosigner" is where you can list any asset that was pledged
as security (such as a car, or a house for a mortgage) and the name of anyone who cosigned for you. "Investment or
Consumption" means whether the debt was incurred for an appreciating asset (such as a mortgage on a house or an RRSP
loan) or whether it was for consumption, which includes nearly everything else including cars and furniture.
When deciding which debts to pay off most quickly, it is a good idea to look carefully at the interest rate being
charged, and focus on paying down the debt with the highest interest rate, then the next highest and so on. Naturally,
it is important to ensure that the minimum payments are made to each creditor every month - this ranking is simply
for any excess money which you might wish to apply toward debt reduction.
Another consideration is the collateral or cosigner, as there may be reason to want to pay off a debt with such
security attached to it. Usually, debts for investment (such as a mortgage) have a lower interest rate than debts
for consumption, and should be the last ones to worry about paying down quickly because they are costing you the
least - especially if they are are tax-deductible.
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