Money

Debt Management Strategies

Published on July 30, 2018 10:00 pm, by

Debts can be good or bad. Good debts are debts taken out to boost income or wealth in the future, such as student debt or an investment home loan. Bad debts don’t contribute to your wealth or income and are things like credit cards and car loans. Debt repayment can be stressful! Let’s take a look at some methods to help you manage and repay them.

Interest rates on your debt

The first and most important thing is to make sure that you have the lowest rate of interest that you can possibly have. Lots of people pay more than they need to on interest, which extends the repayment timeframe.

Whether it’s a home loan, credit card or another type of loan, take a look around and check that you have the best rate that you can find. A lower rate of interest equates to paying more off the principal.

Commit to paying off your debt

Before committing to one of the methods below, make sure you understand what you have. Pull out all your statements and write down the following for each –

  • Balance
  • Interest rate
  • Minimum repayment

Once you understand what you have, consider which of the 3 methods below will work best for you.

(1) Debt Avalanche method

This method gets you to identify the debt with the highest interest rate and put all your extra money into this first.

It is important to make the minimum repayment on all your other debts at the same time – any extra funds are then directed into your chosen debt.

Once this is repaid you close it and move on to the debt with the next highest interest rate. You would now be able to make the minimum repayment + the additional funds you were putting into the now closed account.

Why – The higher interest debts charge more interest and therefore the amount you are paying on interest drops the fastest with this method.

(2) Debt Snowball method

This method gets you to identify your lowest balance debt and put all your extra money into this first.

It is important to make the minimum repayment on all your other debts at the same time – any extra funds are then directed into your chosen debt.

Once this is repaid you close it and move on to the debt with the next highest interest rate. You would now be able to make the minimum repayment + the additional funds you were putting into the now closed account.

Why – This can give you a boost, a psychological feel-good effect of a quicker result in paying off and closing down one of your cards or loans.

(3) Debt consolidation

This is where you take out a new product, generally an unsecured personal loan and use it to repay all your debts. For those with equity in their home, they may wish to secure the new debt against their home and get a lower interest rate.

Make sure you shop around for the best interest rate and product to meet your needs. If you will be in the position to make extra repayments you will want a product that allows you to do that with no penalty.

Why – this method sets your repayments over the term of the loan. You have the certainty that you will repay the debt in the loan term as long as you make the regular minimum repayment.

Why we don’t suggest you take out a balance transfer

In the past balance transfers have been a fairly popular way to reduce debt. They give you the opportunity to take out a new low-interest credit card, transferring your balance to the new credit card. This gives you the opportunity to pay the principal off quickly without paying large amounts of interest.

The unfortunate thing about balance transfers is that it’s your responsibility to ensure your old credit card is closed down. And it’s hard to close down a credit card! Often banks offer all sorts of incentives to get you to keep the old card open. Many people do that and end up spending on the old credit card, and finishing in a worse position than they started with 2 debts to repay.

Why some people recommend this – if you close off your old card and pay the new one off in the low-interest period, you will pay minimal interest.

The easy way to find a lower interest rate

Make sure your accounts are connected to MoneyBrilliant and configured in the Optimise my Banking dashboard. We will regularly show you credit cards (and soon mortgages) that might be cheaper than the ones you have.

 

 

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Jen is an experienced banking professional who loves wine, coffee, finding a bargain and of course her three beautiful children. Since Jen's first budget led her to buy a home at 20, Jen has passionately helped others to make better decisions with their money.

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