It’s no fun being in debt, not even when that’s “good” debt like a mortgage.  When it’s “bad” debt, like high-interest credit-card debt or consumer loans, it can be a truly miserable experience.  Fortunately, debt can and should be a temporary state and with that in mind, here are some tips to help you get out of it.

Understand the basic mechanics of becoming debt-free

When it comes to debt, the problem isn’t (usually) the amount you borrow, it’s the amount you repay, in other words, the interest charges.  The amount of interest you end up paying ultimately depends on two factors, the interest rate itself and the length of time it takes you to pay back the debt.  If you understand how these work then you’ll put yourself in the best position to manage them and, ultimately, to limit the amount of finance charges you pay to their absolute minimum.

Interest rates reflect the perceived level of risk involved.

The perceived level of risk involved depends partly on the individual and partly on the type of loan.  For example, a professional with a secure job (let’s say a maths teacher) would probably be perceived as a very low-risk client in any (financial) situation but would still expect to pay less interest on a mortgage than they would on a credit card because a mortgage is backed by an asset (i.e. a house) whereas a credit card is technically unsecured debt although this is not exactly true since banks can actually claim assets if the borrower defaults on the debt.  They just have to go through a more complicated process to do so.

In practical terms, risk is assessed through a combination of factors, some of which are easier to influence than others.  For example, there may be little you are able to do to change your line of work, at least in the short term, and you may not want to if you are happy doing what you do.  There is, however, quite a lot you can do to manage your credit record and improve how it looks to potential lenders.  Above all, you absolutely must make your minimum payments in full and on time.

The longer you pay interest, the more interest you pay

Interest as a sting in the tail.  Not only do you pay it, but you can end up paying interest on interest on interest and getting into a brutal cycle from which it can take a very long time to escape.  This means that you want to maximise your payments to a debt so as to limit the amount of time for which it is outstanding and hence the amount of interest you pay.

If you are struggling to make any more than the minimum payments, then there are two approaches you can take to improve the situation.  One is to cut your outgoings and the other is to grow your income, obviously, you can aim to do both and if you can then you will have even more money to throw at your debt.

In the current economic climate, this may sound like a case of “easier said than done”, but the key point to note is that little wins can and do add up, so if there’s anything you can do to generate a bit of extra money to throw at your debt(s), no matter how little it seems, then it will make a difference.  Of course, the more extra money you can put towards becoming debt-free, the quicker the process will be, but anything extra will be a gain.

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