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Important tips to follow if you're ready to get out of debt

If tackling your debt feels overwhelming and impossible, you're not alone. While it might seem daunting to take on the challenge of paying off the money you owe, Personal Finance Author Kelley Keehn gave us a masterclass on how to get out of debt. These tips will help you get your finances in order and provide long-term relief! 

UNDERSTAND YOUR INTEREST COSTS

One of the most common ways that many people lose money is by paying outrageous interest costs. While high-interest rates are not always avoidable, knowing exactly what it will be costing you long-term is extremely important. Kelley gave us a much-needed wake-up call by outlining just how much a high interest-rate credit card can run you if you don't pay it off within a reasonable amount of time.

Scenario #1: If you have a balance of $4,000 on your credit card with a 29% interest rate, the minimum monthly payment would be $120. While you might be tempted to only pay the minimum, it would take you 41 years to pay off the card. Not only that, but you would have spent $15,542.93 for borrowing the original $4,000! 

Scenario #2: Keeping the same balance and interest rate in mind, bumping your payment to $200 a month, you will save yourself almost 39 years and $14,011.59. In just two years and four months, you'll have paid off the $4,000 by only dishing out $80 more a month. A little number can make a dramatic difference when it comes to high-interest credit cards!

USE A METHOD TO PAY OFF DEBT

Not knowing where to start is an extremely common obstacle when it comes to paying off debt. Here are two methods you can explore: 

The Snowball Method: This method suggests paying off your debts from the smallest balance to the largest one, regardless of the interest rates. With lots of statements coming monthly, the pile might be the last thing you want to look at. Rather than avoiding it, pick the smallest amount owed and take it on. Paying it off might help motivate you to tackle the remaining. 

The Avalanche Method: For those that want to get the most bang for their buck, this method suggests paying your debts from the highest interest rate to the lowest, regardless of the balance on each. Following the Avalanche Method will help you pay less in interest and save money by paying your debts in the order of their interest rates.  

TAKE A CLOSE LOOK AT YOUR MONTHLY EXPENSES

Falling into a pattern of spending more than you earn can snowball quickly. While it's important to set a budget, it's understandable that expenses can vary from month to month. An anti-budget is a great way to track your spending without putting a hard limit on what purchases you can make. To do so, make notes of 30 days of purchases to become aware of where your money is going. You might not realize that you're spending $200 on coffee or bottled water per month until you physically write it down. Once you see how much your expenses are monthly, you might be able to decrease certain areas and come up with a solution or plan for future months. 

IMPROVE YOUR CREDIT SCORE

Once you've found a working routine to minimize your debt, try to work towards improving your credit score. Many people don't realize that the higher your credit score is, the more money you'll save throughout the years. From car loans to lease payments, a low score could cost you hundreds or even thousands more across the board. According to the Government of Canada, a few ways you can improve your credit score are:

  • Always make your payments on time
  • Don't go over your credit limit
  • Contact the lender right away if you think you'll have trouble paying a bill
  • Limit your number of credit applications and credit checks
  • Don't skip a payment even if a bill is in dispute