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Payment strategies

Payment strategies help you become debt-free without restructuring your finances. They’re the main tool of financial counsellors and work best with credit card debt.

If you have personal loans, there might be a penalty for paying out early that counteracts any savings. But if you have both personal loans and credit cards, there are still benefits to using payment strategies.

Payment strategies suit people who are repaying their debts but have leftover money because they help you to save interest and become debt-free faster. But if you have no money left over and can’t make payments on your debts every month, then payment strategies aren’t for you.

What happens if you do nothing?

If you do nothing and just pay the minimum payments, you will eventually become debt-free. The time it takes to become debt-free is longer than if you used a payment strategy.

No strategy example: 3 debts

Credit card A Balance $1000 Rate 27% Repayment $30
Credit card B Balance $2000 Rate 10% Repayment $40
Credit card C Balance $2500 Rate 15% Repayment $50

Results
Time until debt-free: 79 months
Total paid: $8415

Payment strategy #1: High interest strategy

Mathematically, the quickest way to repay your debt is to take your surplus money and use that to make extra payments on the highest interest debt. This saves you the most interest.

Steps

  • List all your debts in ascending order from highest interest to lowest interest.
  • List the minimum repayment on ALL DEBTS.
  • Determine how much money you have left over after your minimum payments.
  • Pay the minimum repayment plus the left-over money on the highest interest debt.
  • Once that debt is repaid in full, the left-over money plus the minimum repayment from this debt goes towards the debt with the next highest interest rate.
  • Continue doing this until all of your debts are repaid.

Payment strategy #1 example: 3 debts

Credit card A Balance $1000 Rate 27% Repayment $30
Credit card B Balance $2000 Rate 10% Repayment $40
Credit card C Balance $2500 Rate 15% Repayment $50

Total available for debt repayment = $130 per month.

Total minimum repayments = $120 per month.

$130 – $120 = $10 left (surplus) to pay off the highest interest credit card each month.

Under the high interest strategy, the repayments would look like this:

Credit card A repayment = $30 + $10 (surplus)
Credit card B repayment = $40
Credit card C repayment = $50

When credit card A is repaid:

Credit card B repayment = $40
Credit card C repayment = $50 + $10 (surplus) + $30 (A’s minimum payment)

When credit card B is repaid:

Credit card B repayment = $40 + $10 (surplus) + $30 (A’s minimum payment) + $50 (C’s minimum payment)

Results

Time until debt-free: 60 months
Total paid: $7,782

Payment strategy #2: Snowballing

Psychologically, the best thing to do is to repay the smallest debt first. It can be frustrating paying all this money on your debts when you don’t seem to be going anywhere. If you snowball, you get to reduce the number of debts as quickly as possible, which is great for motivation.

Steps

  • List all your debts in ascending order from lowest balance to highest balance.
  • List the minimum repayment on ALL DEBTS.
  • Determine how much money you have left over after your minimum payments.
  • Pay the minimum repayment plus the left-over money on the lowest balance debt.
  • Once that debt is repaid in full, the left-over money plus the minimum repayment from that debt goes towards the debt with the next lowest balance.
  • Continue until all of your debts are repaid.

Payment strategy #2 example: Snowballing

Credit card A balance $1000 Rate 27% Repayment $30
Credit card B balance $2000 Rate 10% Repayment $40
Credit card C balance $2500 Rate 15% Repayment $50

Total available for debt repayment is $130 a month.
Total minimum repayments = $120.
$130 – $120 = $10 left over (surplus) to repay your debts.

Under the snowballing strategy, the repayments would be as follows:
Credit card A repayment = $30 + $10 (surplus)
Credit card B repayment = $40
Credit card C repayment = $50

When credit card A is repaid:
Credit card B repayment = $40 + $10 (surplus) + $30 (Card A’s minimum payment)
Credit card C repayment $50

When credit card B is repaid:
Credit card C repayment = $50 + $10 (surplus) + $30 (Card A minimum) + $40 (Card B minimum)

Results

  • Time until debt-free: 61 months
  • Total paid: $7,815

What does New Leaf recommend?

The payment strategy we recommend is snowballing. It isn’t the best payment strategy, mathematically speaking, but we know from experience that becoming debt-free is one part maths and nine parts psychology.

Find out more

Payment strategies are just one option in a range of debt solutions. For an overview on the options available, take a look here. You must determine whether the information is appropriate in terms of your particular circumstances.

Want to talk about payment strategies or other solutions? Talk to us, and we’ll talk you through your options. We’re experts in finding the right different debt solutions for people who are experiencing difficulty with their debts.

 

 

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