So what even is debt?
The term "debt" comes from the old French word "dette," which means "obligation." Debt is money owed by one entity to another, such as a person, corporation, organization, or government. When you borrow money, you usually sign a deal with the lender to repay the money on a set timeline, perhaps with interest or a charge attached. Credit cards, auto, student, and mortgage loans are all popular types of debt that most people are familiar with.
Debt includes loans, bonds, notes, and mortgages. Debt, as opposed to equity, is a form of financial transaction in financial accounting. Debt can be a valuable financial tool or a burden that complicates your life, according to your situation. Credit is the polar opposite of debt, but the two are inextricably linked. Debt and credit are just two sides of the same coin when it comes to deferred payments. The main distinction is that debt is a burden for the debtor but an asset for the creditor. Banks play an important role in loan facilitation by acting as lenders!
Simple Terms: A debt agreement allows a borrower to borrow money on the condition that it be repaid at a later date, usually with interest.
It’s hard to live debt-free these days, the majority of us are unable to pay for our homes or our university educations in cash, so credit is very useful.
The reason people go into debt?
We develop debt for a variety of reasons, including paying for unexpected expenses or being laid off. Debt is frequently the outcome of poor spending habits, because it costs money to spend money. Spending more than you make, without a plan to pay back the money you've already spent, you'll end up with additional debt as a result of interest. However, it's not just over-spending that’s responsible for debt, but emergencies that require financial aid are often to blame.
Helpful Tip: In a past blog, we wrote about how to “How to Save Without Changing your Lifestyle” , we explained how to shift your money mindset. Everyone has different mindsets about money. From our spending habits to the way we save, it is important to think about your attitude towards personal finances, before you begin making changes to your habits.
Key questions to ask yourself:
- Do you currently have a budget?
- If you have a budget, ask yourself “is it working?”
- If you do not have a budget, ask yourself “why?”
- Is there anything in your life that is taking a substantial toll on your paycheque?
- What is your biggest financial goal?
- Do you currently have a plan to achieve your goals?
Once you reflect on your current financial situation, you can begin taking steps towards future goals. Personal reflection is extremely important, as it will help you see what you are doing well and what you can improve upon. It is also important to remind yourself that anything is possible if you make a plan and set concrete goals for yourself to achieve. Remember… Personal finance is 80% behaviour and 20% tactics!
There are two different kinds of debt!
Keynote: The existence or absence of collateral—something used as security against non-repayment of the loan—is the primary distinction between secured and unsecured debt.
Secured
Secured debt is debt that is backed or secured by collateral in order to lessen the risk of lending. If a borrower fails to repay a loan, the bank takes possession of the collateral, sells it, and uses the revenues to repay the obligation. Because the assets that support debt or a debt instrument are regarded as a form of security, unsecured debt is regarded as a riskier investment than secured debt. Secured debts are those for which the borrower pledges an asset as a guarantee or collateral. A secured debt instrument simply means that the lender can use the asset to repay the monies it has advanced to the borrower in the case of default.
Summary: A secured debt is one for which the creditor has a security interest in collateral, which means the creditor has the power to seize assets in order to repay the loan.
Unsecured Debt
As the term implies, unsecured debt has no collateral backing. If a borrower fails on this form of obligation, the lender is required to file a lawsuit in order to recover the debt. Credit cards, medical bills, most personal loans, and student loans are all examples of unsecured debt. These debts assist you in accomplishing a goal (buying products, paying your doctor, or obtaining an education), but they are not secured by any assets.
In this comes the difference between a secured and unsecured credit card. The deposit is the most significant distinction between secured and unsecured credit cards. To secure your credit limit on a secured credit card, you must make a deposit. Your credit limit is determined by the amount of money you put down as a security deposit.
This means that if you pay a $400 security deposit, you can use your credit card to charge up to $400. Your credit limit will be higher if you make a larger deposit. This also means that if you have a secured credit card, you can extend your credit limit at any time by depositing more money.
No deposit is required for unsecured credit cards. The amount you can spend on these cards is determined by your credit history and the amount the lender approves.
In conclusion: So, secured credit cards are ideal for people who want to improve their credit score and financial situation. A secured credit card may be the best option for you if you're a newbie to Canada, a student, or just want to enhance your credit history. Check out Plastk’s Secured Credit Card to start building your credit.
How can you pay off credit card debt?
- Calculate the total amount of debt you owe and prioritize them.
It's critical to comprehend the overall amount of debt you owe, even if it seems frightening. You'll be able to establish a repayment plan that genuinely works if you have a clear understanding of the numbers. This can be as simple as creating an Excel spreadsheet or adding your credit cards to a free software that will assemble the data for you. Plastk Secured Credit Card offers free credit insights and monthly credit scores to their customers.
Knowing which of your debts (outstanding balances, interest rates, and charges) are most important, is crucial to be able to pay them off in proper order. Experts say that most people prioritize their mortgage and automobile payments since they provide housing and transportation to and from work.
- Keep your spending under control and re-prioritize your budget
As previously mentioned, there are lots of tips and tricks to keep your spending under control and to keep you out of debt. Similar to our blog “How to Save Without Changing your Lifestyle,” a useful hack to your savings is to save the 10s. You can save the tens from your paycheck each time you get paid. This means that if you are paid $656 per pay period, you will deposit $56 into your savings account each pay period. Using this strategy in your life can help you save money without depleting your paycheck!
Using the scenario above, if you are paid $856 every two weeks and save $56 every time you are paid, you will have accumulated $1,344 in a year!
Begin by separating your monthly expenditures into categories such as groceries, transportation, housing, and entertainment. Many providers categorize your expenditure, so your credit card statement can be a useful tool to find out where you spend your money.
After that, seek for places where you may save money. Then put the money you've freed up toward paying down your debt.
- Loans or credit lines can be used to consolidate debt.
When you consolidate your debt, you're combining all of your outstanding debts into one. Debt consolidation will not only help you better manage your monthly payments, but it should also allow you to pay less interest than you would have paid if you had paid all of your previous rates together. By applying for a debt consolidation loan (and making only one monthly payment on your new loan) and opening a line of credit, and using it to pay off your remaining debt, you will be better able to consolidate your debt.
- Lastly, keeping an emergency fund.
Building an emergency fund seems daunting, but people who have experienced huge, unexpected bills may undoubtedly tell you either how relieved they were to have emergency cash or how tough it was to come up with the finances to cover the expense. With every financial setback, your emergency fund can assist you avoid adding to your debt.
Debt Strategies
There exist a handful of different debt strategies, ranging from debt snowballing, avalanching to consolidation! These debt repayment strategies are dependent on what works best for you. For more on debt strategies, keep updated on our weekly #CreditTipTuesday for more information every week.
Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
