Let's say you owe money on your credit card. This is a form of debt, and if you don't pay it back, it may cost you as much as 18% interest a year. But if you pay the debt off quickly, you keep that 18% interest for yourself. For a $5,000 debt, that's $900 more in savings each year!
Avoiding or paying off debt is smart for a number of reasons. It means you can:
- Avoid costly interest charges. You may pay a higher rate of interest on a debt than you would likely make on an investment.
- Start growing your savings. Even if the debt you have does not charge a high rate of interest, the sooner you pay it off, the sooner your money can start earning interest.
- Worry less about money. If you have debt, you may feel a lot of stress trying to find the money to pay your bills each month.
- Get more credit if you need to borrow in the future. If you fall behind on paying off your debts, you will have a hard time borrowing more money next time.
The hidden cost of debt
There's another important reason to avoid or reduce your debt. When you pay back a loan or a credit card, you are paying it back in after-tax dollars. In other words, you must earn money to pay back the debt, plus interest, and you must also pay taxes on that money. If you are in the highest tax bracket, you may have to earn more than $200 to pay off a $100 debt.
Remember: Borrowing costs money
The longer you owe money, the more it costs. That's why it's so important to pay it off as quickly as you can.
Learn more
If you're not sure what to do, there are credit counselling services that can help you. You can find a list of not-for-profit agencies at the Credit Counselling Canada website or in your phone book. These agencies have helped hundreds of thousands of Canadians fix their debt problems and learn to use money and credit wisely.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
