Paying off debt sucks. Yes it is fun seeing the figures going down but overall it sucks, especially when you know you still have weeks/months/years to go until your debt free. My debt repayment is an all consuming thought. I spend a lot of time thinking about how I am going to clear my debt and analysing my spending.
Since I became serious about clearing my debt I've read up a lot on finance and come across a lot of different methods/systems of assisting in debt repayment. Obviously I am not a financial advisor so I cannot advise you how you should pay down your debt. However, I decided to collate and share the methods and tips that I have come across.
If you have multiple debts choosing what debt to put extra payments towards can be difficult. A popular approach is the 'debt avalanche'. The aim of this method is to concentrate on putting extra payments towards the debt with the highest interest rate and only pay the minimum payment on the rest of the debt. The aim being to clear the most expensive debt first in order to reduce the amount of interest payments that will be paid overall.
Once you have cleared the first debt, you then use the minimum payment for that debt plus any extra sums you can muster towards the next debt and repeat until all debt is cleared. Gradually the amount you pay towards each debt will become bigger and bigger as you will pass the minimum repayment sum to the next debt.
To date, I have been following this approach.
The idea behind 'debt snowball' is that you pay off the smallest debt first irrespective of the interest rates. If you have a lot of debt, and paying that debt off is likely to take a long time, the theory behind the debt snowball method is that if you clear the smallest debt quickly you will remain motivated to pay off the rest of your debt as it is an early 'win'.
You then use the payments from the first debt to go towards the next debt as with the debt avalanche.
Please note that the 'avalanche' and 'snowball' terms may be the other way round on some sites and other sites refer to the 'avalanche' method by other names altogether.
You may wish to use this calculator to work out what is the best method for you (note it refers to 'snowball' as the 'avalanche' method). Ignoring the fact that my credit card debts are all now on 0% interest, if they were still on the normal APR for my figures (£11,583.74), and I was only paying the minimum repayments, my debt repayment would be as follows:-
Avalanche - 86 months to clear my debt & a staggering £12,454 would be paid in interest!
Snowball - 86 months but £14,631 in interest!
For me, debt avalanche is the better method but I can see the logic in the snowball method. If my credit card 3 was not on a 0% interest when I started trying to clear my debt in January 2014, I probably would have cleared that card first just so I would only have two credit card debts to deal with.
If your debt has a high interest rate you may be better off trying to consolidate your debt. There are a two methods you can undertake to achieve this.
- Balance transfer
Balance transfer cards are very common in the UK. At the moment a number of credit card companies are offering 0% balance cards that exceed 30 months. Some also offer to transfer the balance for life at a low percentage rate. One of my credit cards offers 6% for the life of the balance transfer. If your level of debt is fairly low, and you have a good credit rating, this is an option you may wish to consider.
For me, I have over £11k of credit card debt. Never in a million years would I get a credit card with a balance that high to enable me to transfer over the entire debt. However, with the three cards I possess I have been able to swap the balances between the cards so that my debt is now almost all at 0% interest (I'll explain further in next months debt update).
However, by transferring your balance you may want to consider your future plans.
My boyfriend and I really want to buy a property next year so are trying to improve our credit ratings. My boyfriend's credit rating is 'good' but took a hammering when he decided to buy our new sofa on 0% interest credit. In hindsight this was a mistake, he could have afforded to pay in full immediately. My credit rating is also 'good' but my points are lower than my boyfriend's. I am rather reluctant to open a new card in case it reduces my credit rating so I am a little at the mercy of my current credit card providers when dealing with my debt which brings me nicely to my next point....
You need to check the time the 0% balance is available for. One of my 0% balances is rather short so I need to pay off as much debt as possible in 5 months. The golden rules with 0% balances are:-
- check when the deal ends
- check what the interest rate will be when the deal ends
- check what the fee is
- check you can clear the debt during the 0% period
- Never miss a minimum repayment
For me, I know I cannot clear the debt on my cards during the 0% period. I need to keep a beady eye on my cards and ensure I transfer the balance again. I am being a little risky but I think this risk will pay off.
Each time I transfer I pay a fee so I need to calculate whether paying the fee is worth it for the saving in interest. As I was paying a lot more than the minimum repayment, incurring a fee is worthwhile for me. But it may not be for you. If you are only paying the minimum repayment the fee on a short term transfer may not make it worthwhile. DO YOUR MATHS and consider the points above before transferring the balance.
A standard loan may also be a better option in order to consolidate your debt. The interest rate on a loan is likely to be lower than credit card debt. However, with loans you may be locked into a fixed repayment period which may be a pain if you want to clear your debt more quickly but this could be a bonus as it will be easier to budget.
Please note that I do not agree with the emergency/pay day loan companies that advertise on TV etc. You want a loan with a smaller interest rate, not one where you pay £50 for every £100 you borrow!
I hope this has been helpful - next week I will be providing more information in assisting with debt repayment.
* All pictures courtesy of www.freedigitalphotos.net
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