Money and Life
(Financial Planning Association of Australia)
To get on top of your finances, clearing debts is essential but how can you find a strategy that’s going to work for you and your money habits? Explore some of the ways to go about tackling your debts so you can start working towards your other financial goals.
Being in debt can really wear you down, both financially and emotionally. Whether it’s a single large credit card balance or multiple loans, store and credit cards owing, getting clear of your debts is going to make a big difference to your financial future.
To get started on an effective strategy for saying goodbye to debt, you need to understand just how much you owe. Add up any outstanding balances on credit and store cards as well as personal loans and remember to include any Buy Now Pay Later arrangements you’ve made. Doing this will help you to choose a debt solution that’s going to be effective for you.
Here are five methods that could help you get debt-free:
Consolidate debts into a single loan
Debt consolidation involves taking all your monthly debts and rolling them into a single low interest rate loan. If you have enough equity in the property you currently own, you may be able to refinance your home loan to consolidate your personal debts into your mortgage.
By putting all your debt into this loan, you should be paying less monthly interest overall. This could help you get rid of your debt faster as you may be able to make bigger repayments on your loan as a result. If you’ve only been paying the minimum amount each month on your credit card balance, for example, it could take you decades to pay back what you owe. Taking out a loan with a fixed term instead can help you repay the amount in full over a shorter period of time.
It also brings the benefit of making it easier to keep track of what you owe and cuts down on time and paperwork needed to manage multiple accounts. Plus, you’ll only be charged one set of loan fees and you’re less likely to miss a payment if there’s only one to make each month.
If you’re thinking of using this approach to clear your debts, keep in mind that there may be fees and charges associated with borrowing for debt consolidation, whether it’s a personal loan or a mortgage. You’ll need to be sure any savings on interest paid aren’t outweighed by these costs.
Use a balance transfer card
There are lots of credit cards out there offering 0% interest on balance transfers from an existing credit card for a limited time, usually six months or more. When the introductory offer period is over, any remaining balance on the card will revert to a standard advertised rate.
This can be a good solution if you have temporary debt to clear, from spending a bit too much at Christmas or on holiday, for example. If you have money available from your income to pay off the balance in a matter of months, then a balance transfer card can save you on interest, stopping your debt from growing.
Make sure you check for any fees to make sure these don’t cancel out what you’ll save in interest. Some cards may charge a percentage fee for the amount you transfer from another credit card or loan and others come with annual fees. Any purchases you make using your new card will attract interest. So if you spend more money on your new card, or keep spending on your old card, you’ll be building up more debt that’s liable for interest.
Try the avalanche method to save money
With the avalanche method, you keep all your debts as they are and focus on paying off as much as you can from the debt with the highest interest rate. You look at the rate you’re paying on each loan or credit card and direct any spare cash you have towards making extra payments on the balance with the highest interest rate. In the meantime you’ll continue to pay the minimum amount across all your other debts.
This approach is all about limiting the amount of interest you’re paying on your debts to save you money. If you find you’re motivated by this goal of getting out of debt by paying the least possible amount of interest, this is a method that could be right for you.
Stay motivated with the snowball strategy
For others, it can be more satisfying to take the snowball approach to tackling debts, one at a time. By directing all your extra payments to the smallest debt first, you get the reward of clearing one balance quickly before moving on to the next smallest and so on. The idea here is that you get extra motivation from ticking small debts off your list which can help you to keep going until all your debt balances are paid off.
This method can work well if you feel discouraged and overwhelmed by having many different debts to pay. Having a win under your belt can help you feel more positive about your ability to get debt-free.
Get help from your credit providers
If you’re struggling to make minimum repayments on debt and keep up with your essential bills and expenses, reach out to your creditors to see if you can make a new arrangement for paying off the outstanding balance. You can do this yourself or work with a financial counsellor. In a free consultation they can review your financial situation and budget, negotiate repayment arrangements with creditors and explain your different options.
Looking for more help with paying off debts and getting ahead with your finances? Find out more about Managing Debt from Money & Life.