There are two main approaches to minimising debt as advised by some of the top financial planners in the country and they are commonly referred to as the “Debt Stacking Method” and the “The Snowball Strategy”. In both scenarios you will need to make the minimum monthly repayments on all of your debt so as you can minimise any late payment fees.
Ok, so let’s say that you have a $20,000 credit card with an interest rate of 19% pa, a personal loan with a balance of $10,000 which has an interest rate of 8% pa and a car loan with a balance of $5,000 with an interest rate of 6% pa.
Using the snowball method, you would make the minimum repayments on all other debt and using any extra funds on paying back the car loan with a balance of $5,000 at an interest rate of 6% pa. Once you have paid back that debt, you would then focus on the 2nd smallest debt being the personal loan, which has a balance of $10,000 and an interest rate of 8% pa. Once you have paid the personal loan back, you would use the minimum balance on the car repayments, plus the extra money from paying back the personal loan, plus the interest you would have paid on the car and the loan to begin to pay on the credit card. Once this has been completed, yes you have got it! You would use all the extra money to put towards maybe a home deposit, save for a holiday or begin to invest!!
Now the “Debt Stacking Method” personally not my favorite, however, is the most cost effective as you will minimise the amount of interest paid. In this scenario, you will make the minimum monthly repayments on all debt to minimise the chance of getting late payment fees. You would focus solely on paying back the credit card with a balance of $20,000 and an interest rate of 19%, once this has been paid, you would focus on the personal loan with an interest rate of 8% using the money that you would have been using to pay off the credit card debt. Once you have paid this off, you would focus on paying back the car repayment, using the money from the credit card debt, plus the car loan minimum monthly repayments, and, of course, the extra funds from the interest.