The Best Debt Repayment Strategies

When we’re young, we rarely think about money. We dream of fabulous trips around the world, large houses, fast cars and everything that we will buy. We’ve got a vague idea that it’s our careers that will provide the money to pay for these things, but the money itself rarely factors in our dreams. Then, as we get old enough to start earning money, we’re offered credit.

In school, we’re not taught how to manage our finances or stay out of debt and for young, excited minds eager to get out there and start living their dreams the temptation of credit is often too much. Why wait and save for something, when you can put it on a card and have it now? Of course, frivolous spending isn’t the only way that we get into debt. We may have to take out a student loan or a loan for a new car. We might owe money to our parents or have a large mortgage that needs paying off. Whatever the reason for the debt, however, no matter how fun and frivolous or necessary and life-altering, it needs paying back.

Aside from private loans between family members (but, sometimes even then), one thing most debts have in common is interest. A few purchases on a credit card when we were just out of school can snowball. The interest rates can make it impossible to save enough to clear the debts. Forcing you to use credit more. Then, even when you are in a better financial position and perhaps more responsible with money, it’s hard to see the bottom of your debts when the interest rates are crippling. One relatively small debt can suddenly become a chain around your neck. Something that’s going to cost you much, much more in interest and blemish your credit report and bank statements for years to come.

So, if you are in debt, it’s essential that you pay them off as soon as you can. Here’s a look at what you need to do, and some of the best strategies to get you debt free.

 

Put them in Order

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If you are fortunate, your only debt is your mortgage. In which case, it’s still a great idea to try and pay extra (unless your contract conditions mean this could cost you more) when you can, to clear the balance much faster.

Most of us, however, have more than one debt. That first credit card that you promised yourself would be “for emergencies” can lead to many more. Deciding to do something about it is the first step. The next is putting your debts in order and assessing your situation fully.

Take a look at how much you owe on each debt, any charges that you are incurring and the amount of interest that you are paying on each. Look at this in percentages, rather than the financial figures. Then, write them down in order. Putting the debt that is costing you the most at the top. Even if you chose not to pay them in order, it’s good to know where you stand and what you can expect.

 

Pay More than The Minimum

A huge percentage of people with credit card debts are paying the minimum repayment every month. This means that you are paying the maximum amount of interest and that your debt will last for a very long time. Start paying more.

If you think that you can’t afford more, look at your most recent payment. Say last month it was $50, this month will probably be slightly lower, but you could afford that $50, so set that as your monthly repayment using a direct debit. This means that you will always be paying a little more than the minimum and that over time, the difference will grow.

 

Snowballing

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Snowballing is an effective and aggressive way to pay your debts. First, if possible, move some of your money around. Take a look at that list you made in the beginning. Which card or debt do you pay the least interest on? Is it maxed out? If not, transfer some of your other debts over too it, so that there is less debt on the higher interest cards. If you can transfer any full amounts, close those accounts.

Then, look at what’s left. Take the card with the highest interest, look at your minimum repayment and what you could afford if you made a few cutbacks, claim what you are owed with a car crash lawyer or by applying for state benefits. Say you can pay $100 a month, and this means you’ll have cleared that debt in 18 months. For that 18 months, continue to pay the minimum on the other debts. Setting up a direct debit so that you can’t forget and incur further fees. Then, in 18 months’ time when the first debt is clear, close the account and add that $100 to whatever you are paying on the next card on your list.

Your repayments will grow, snowballing as you pay more off. Increase the amount whenever you can, and you’ll pay your debts off significantly faster.

 

Balance Transfer

Balances transfer cards can make an excellent option if you’ve got a good income and your credit report is good enough that you’ll have no trouble getting accepted. Banks and credit card companies are frequently offering balance transfer deals to entice new customers so look around for the best deal right now.

You can usually transfer your debt to a new card for a small fee of around 2-5%. This balance will then be interest free for a set amount of time. Often up to 30 months. Use this time to aggressively pay off as much of your debt as you can. Then, at the end of the interest-free period, consider moving the debt once more. But, remember every time you make an application a mark is made on your credit report.

 

A Consolidation Loan

If a balance transfer isn’t possible, or you’ve got too much debt to be approved, you might want to consider speaking to your bank about a consolidation loan. This is a way of borrowing enough money to clear all your debts. Leaving you with only one debt to repay, often at a lower interest rate than credit cards.

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