Money

Is paying your debt off one card at a time the best way?

Published on May 12, 2016 9:33 am, by

If you have more than one credit card and/or unsecured loan what do you do? How do you get them out of your life? Which one do you pay off first? Where do you start?

Firstly you need to commit to changing spending behaviours and focus on your debt. Credit cards are bad! Lots of people feel that credit cards are the enemy to their finances and getting ahead. Still they keep them close and interact with them often.

For a while, you might need to take a step back, go out less, go to the shops less, stay away from online shopping.  Think about how you can spend less and still spend your time well.

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 4 methods below will work best for you.

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 payment on all your other debts at the same time – any extra funds are then directed to 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 payment + the additional funds you were putting into the now closed account.

Why – Advocates of this method like knowing the higher interest rate debts charge more interest and therefore their interest rate charges would drop fastest by using this method.

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 payment on all your other debts at the same time – any extra funds are then directed to your chosen debt.

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

Why – Advocates of this method like the motivation and psychological feel good effect of paying and closing down one of their cards or loans.

Balance transfer

Balance transfers give you the opportunity to take out a new low-interest credit card, transferring your funds to the new card. This gives you an opportunity to pay the principal off quickly without paying large amounts of interest.

Upon taking out a balance transfer it is your responsibility to ensure your old credit card is closed down. If you don’t do this, you run the risk of using it again and putting yourself in a worse financial position.

You will need to calculate your own repayment to make sure you pay off the balance in the low-interest rate period, as often the rate will be quite high after this agreed time.

Know that banks will generally have an upper limit that they will approve for this product, and they will look for a good credit history and repayment capacity.

Article – Credit Card Balance Transfers
Article – Knowing your credit score

Why – this method would take the shortest amount of time, as the majority of your payments are coming off the balance with limited interest payments.

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 & 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 is set repayments over the term of the loan.  This method gives you the certainty that you will repay the debt in the loan term as long as you make the regular minimum repayment.

Lastly make sure all your accounts are connected in MoneyBrilliant so you can watch change happen!

Related Articles –
How to Pay off your home loan faster
Beating the Urge to Spend
Goal Setting: What? Why? How?

Share now

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.

Still searching?