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November 24, 2015 - The psychology of paying down debt

Repaying debt is never fun but there is psychology behind it. Here’s some information about debt and the latest theory on how best to get rid of it:

  • Canadians are becoming comfortable with high debt loads because of the long run of low interest rates. But what happens when rates eventually start to rise? Canadians need to get a handle on their debt and start to reduce those levels.
  • There are two basic approaches to paying down debt. The first approach tackles debt starting with the smallest total first, so you get that hit of satisfaction when you can actually cross one off your list sooner rather than later.
  • The second looks at the relative interest rates of each debt and targets the one with the highest interest rate first, so you’re saving the most money on your interest costs. This is the approach that will save you more money in the long run.
  • Interestingly, though, the Journal of Market Research recently reported this approach – paying off higher interest debts first – is used less often because smaller debts feel more manageable than larger ones.
  • If you can force yourself to tackle that high interest rate first, do it! However, ultimately you should use whichever approach works best for you.
  • Another approach involves consolidating your debt. You will need to make an appointment with your financial institution and talk to them about debt consolidation loans, and what interest rate you would qualify for.

Looking for more helpful information? Check out past segments