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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.

The “Snowball Method” starts from the smallest debt, focusing on paying that one debt at a time, eventually moving onto the 2nd largest debt. You may pay more interest this way, however, the psychological reinforcement of getting one debt out of the way and paid is sometimes more beneficial to the person paying the debt, therefore reinforcing the need to stick to the strategy.

The “Debt Stacking Method” is better on your pocket in the long term as you look at paying off your debt with the highest interest rates, then once that has been paid off, focussing on paying the amount with the second highest interest rate and so forth.

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.

Now, if you wanted to get especially technical, you also do have further options such as transferring the balance of your credit card to an ‘interest free’ credit card, however these are usually offered with terms and conditions attached, which will more than likely only have this benefit for a certain amount of time – which you will need to keep in mind if you do not plan on having all the other debt paid off in the given time.  It would be best to speak to a debt reduction specialist before looking at jumping ship to an interest free credit card without having a plan in place.