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Expert Q&A: How to get debt under control

By Daniel Workman

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Debt has become a four-letter word that arouses gut-wrenching fear among consumers, business executives and government leaders alike.

TinaTehranchian

Tina Tehranchian

CreditCards.ca asked Tina Tehranchian, Certified Financial Planner (CFP Professional), to explain how Canadians can cope with their personal debt loads amidst the current global economic chaos.

CreditCards.ca: May we start with the difference between good and bad debt?

Tina Tehranchian: That's a good question. Not all debt is bad. If you're borrowing to invest to build up assets, that's good debt. Without a mortgage, most of us wouldn't be able to afford or build up equity in our homes. Taking out a loan to go to school is another example of a good-debt investment.

Bad debt is usually for consumer items that won't build up equity or help generate income. Examples are borrowing to buy a bigger couch, fancy clothes or go on a luxury vacation. These are things that don't help increase your net worth. You have to be very careful if you borrow for these items that you're able to pay off bad debt as fast as possible. To begin with, try not to go into debt if you can't afford the purchases.

CreditCards.ca: What are three actions that Canadians can take right now to get debt under control?

Tehranchian: The first action is to start to manage your cash flow very actively. Because if you don't have a good understanding of where your money goes, how you're spending and the resources coming in, that's the first thing that can get you into debt trouble. You have to be vigilant with your spending at all times, so make sure that you spend less than you make.

Number two would be for people who already have debt -- especially high-interest credit card debt -- to try and consolidate the debt by taking advantage of lower interest rates on personal and equity lines of credit. The lower the interest rate, the sooner you'll be able to manage and pay off that debt.

Thirdly, monitoring your credit rating is very important. At the end of the day, it's your credit rating that determines the interest rate that financial institutions charge. The more vigilant you are in terms of paying off your debt on time, not missing any payments and making sure that you're not maxing out your credit card, the better your credit rating will be and the lower the interest rate that you'll be offered on different types of loans and mortgages. Consumers should always try to negotiate lower rates and will be in a much better position to do so.

CreditCards.ca: Are there any debt factors over which Canadians have no control?

Tehranchian: Well, the general direction of interest rates is obviously out of any consumer's control. The only thing that we can do to protect ourselves is to build in some room in our budgets for the possibility of interest rate rises. For example, if you were going to apply for a mortgage now when interest rates are at historically low levels, always be sure that you're going to be able to handle that debt even if interest rates go up another 3 per cent.

CreditCards.ca: How can Canadians manage debt when the cost of living keeps going up?

Tehranchian: For the average Canadian family, it's very challenging. There are two ways to manage. One is to cut down on discretionary spending on anything that isn't absolutely essential. The other way is to increase your earnings. Now, it's not always possible for everybody to increase their earnings, which is why it's so important to have a very good handle on cash flow in a situation where you're facing rising costs.

CreditCards.ca: Do you think that Canadians need a debt wakeup call?

Tehranchian: We've had a nice run with our economy, but unfortunately the debt levels of ordinary Canadians are very high. I think that Canadians have to put debt reduction higher up on their list of priorities and not wait for disaster to happen. Prevention is more important and much easier to do than a cure. As Canadians, we should take advantage of the situation we're in. We're lucky that our economy is in relatively good shape, and we shouldn't miss this opportunity to tackle our debt.

CreditCards.ca: Are there any other debt management tips that you'd like to highlight for our readers?

Tehranchian: For people who are in debt trouble, try to get help as soon as possible. The more you try to hide or deny the problem, the deeper the debt problem will become and the harder it will be to get out of it. There are many non-profit and for-profit organizations that can help people manage their cash flow and get out of high-interest debt.

See related: 6 debt spirals that threaten Canadian households; How to find a qualified financial planner


Published: October 5, 2011