Jump Start Jan: Debt Week Day 5

If you’ve already taken steps to stabilise your finances and stop your debts becoming worse, it’s time to think about strategies for debt repayment. You have a number of options, but some of them are smarter than others, as we’ll see.

• Option 1: Keep making the monthly minimum repayments. This will certainly keep your creditors off your back, and be better for your credit rating than missing payments. If it’s all you can reasonably afford, keep doing it (and maybe think about ways you could increase your income). However, it can take years to get out from under a debt with these small repayments.

• Option 2: Increase monthly repayments on all your debts. Before doing this, check there are no early repayment penalty clauses in the small print of any credit agreements, which you may find with some loans. You can make moderate or large increases, according to what you can afford and also according to your level of motivation. This option will help you to clear your total debt load much faster than making the minimum repayments (although the total cost of the debt over time will be higher than with Option 4). It can also give you the psychological edge of feeling like you’re taking action and making progress (although Option 3 may have a stronger effect).

• Option 3: The snowball method. This is where you make an extra effort to pay off the smallest one of your debts first, before moving on to the second smallest debt, and so on until the total debt is paid off. This debt reduction strategy gives the feeling of a ‘quick win’ so it has a short-termist attraction, at least until you end up with the biggest chunk of debt to slog through for ages at the end of the plan. However, the biggest minus point is that by ignoring the interest level of the debts to focus simply on the size of them, you’re likely to end up making larger total interest payments by the time you’ve paid everything off in full. It’s an expensive strategy in purely cash terms.

• Option 4: The stacking or avalanche method. You start by making extra repayments on the highest interest debt first, and hammer away at it until your most expensive liability is gone. This is the method where the maths adds up, and it will allow you to clear your total debt with the lowest total interest charges. It might take a while for it to feel like it’s getting going, but once the first debt’s out of the way the others will be more manageable and less of a burden to clear, and it’s ‘downhill all the way’. Since you’re less likely to run up huge interest charges with this strategy there could be fewer repayments to make in total too, meaning that you should be able to clear the total debt a little faster.

Do you have more than one debt as part of your total debt load? Which debt would you choose to pay off first?