How to improve your debt literacy

Many people struggling with their finances often comment that they didn’t fully understand debt when they were applying for the credit. This includes the associated costs, payments, and how it would impact their overall financial health. It is more important than ever to improve your literacy around debt to prevent you from being taken advantage of — especially as access to loans grows from a seemingly endless stream of online lenders.

Factors such as interest rates, repayment terms, and the true cost of borrowing are often not considered by consumers at the time of taking out the loan or applying for credit. This can create significant challenges down the road as you struggle to repay your debt. Improving your debt literacy will give you the tools to make informed decisions about your borrowing.

What are the key components of debt literacy?

Three key components can help you build your debt literacy:

Know your lender

It is crucial to understand who you are borrowing from before you make a decision. Payday lenders are quite common in today’s lending environment — however, these types of lenders often target those with few options or little knowledge of credit.

While payday loans seem to offer a fix to your short-term needs, the high interest rates and fees associated with these loans can trap borrowers on a treadmill of debt and lead to reduced spending power. Debt literacy helps inform you about the potential pitfalls of these lenders and equips you to seek better alternatives for your borrowing needs.

Understand interest rates and fees

Interest rates and fees have a considerable impact on the amount of debt you ultimately pay back to your lender — no matter whether you took out a payday loan, car loan, or mortgage. Interest rates affect the true cost of your purchases and even a small difference can have a larger effect over time. It is important to understand and pay attention to the interest rates on your loans to help you make the right choices for your financial situation.

Minimum payments

Credit cards typically carry interest rates between 20 and 30 percent. Many people believe that their credit is good if they are able to make the minimum payments on what they owe. However, making the minimum payments on a credit card should never be the goal, since it inflated the price of the items purchased on the credit. Literacy around the compounding effect that credit card debt has on your finances can help you understand the true cost of simply servicing the minimum payments.

How to improve your debt literacy

There are many resources available for those who want to grow their debt literacy, including:

MNP Debt Scale

The MNP Debt Scale can help you understand how debt is impacting your financial health. This online tool is quick, easy to use, and completely confidential. It asks 14 questions to help you learn more about your debt health — and provides steps you can take to either achieve or continue to live your debt-free future.

Using this tool improves your debt literacy by helping you understand where you are succeeding with debt and where you may be struggling. The insights it offers to help improve your financial health can also increase your overall debt literacy.

Get professional advice

If you are struggling with debt, contacting a Licensed Insolvency Trustee (LIT) can provide you with the advice and insights you need to improve your financial health. An LIT will set up a free and confidential consultation to assess your debt situation. They will then help you understand each of your options to achieve a debt-free future.

These options may include debt consolidation, credit counselling, or an informal debt settlement where you work directly with each creditor to create a more flexible, realistic repayment plan. If you are deeper in debt, a Bankruptcy or Consumer Proposal may be the right choice for your specific situation. An LIT will go through each of your options so that you can make an informed decision that works best for you.

Take control of your financial future

Debt literacy is necessary to protect your financial health. Knowing your lender, understanding interest rates and fees, and avoiding minimum payments can help you stay debt free.

If you are struggling with debt and financial stress, contact an MNP LIT. We have the knowledge to help you understand all the debt relief options available so you can choose the one that works best for your unique situation. Together, we can help you achieve a debt-free future.