The amount of interest you pay on your borrowing is often the element that makes it unmanageable at some point. When you miss a payment, you are charged interest on the amount outstanding, plus a fee for being in arrears.
These can be significant amounts for anyone to pay, but if you’re already struggling to repay debt, it can be the tipping point into serious financial problems. So what can you do to pay off your debts sooner, and minimise the amount of interest?
Initially, you need to identify and pay your priority debts first – these can include:
After these priority debts, you can consider your credit and store cards, catalogue debt, personal loans, and any other unsecured lending that does not fall into the ‘priority’ category.
When deciding which bills you should consider a priority, think about the consequences of not paying them – could you lose your home, for instance, or will your energy supplier take action?
Repaying more than the minimum amount is the key to paying off debt quickly, but you also need to identify which debt attracts the highest rate of interest. Other factors to consider are whether there are any restrictions on overpaying, as some loan terms and conditions may have a stipulation that you cannot overpay.
Another consideration is whether you’ve taken any cash advances on a credit card. If you have, you’ll be paying a high rate of interest from the day you took the advance until you pay it off in full. It would be worthwhile paying this amount off first, assuming that it also represents the highest interest.
If you have spare money at the end of the month after paying your priority bills, however small the amount, use it to pay the minimum amount on non-priority debts and as much as possible on the most expensive.
Once the most expensive debt has been repaid in full, move on to the loan or credit card that has the next highest interest rate and repeat the process, paying off as much as possible each time. This method of minimising interest and paying off debts quickly is commonly known as the ‘debt avalanche’ system.
There is another method of repaying debts which you may be aware of – the ‘debt snowball.’ This involves paying the smallest debt first, and then moving on to the next smallest.
Although effective in some respects as you gain motivation by quickly repaying one debt in full, the ‘debt snowball’ method is not as efficient financially as you’re not focusing on the debts with the highest interest rate.
Another way to deal with high-interest debt is to move it to a 0% or low interest rate credit card.
If your credit rating is good, and you’re paying a high rate of interest on your credit cards, a 0% balance transfer deal will help to pay off some of your debt quickly, and also minimise interest.
There is a fee for transferring your balance(s) in this way, but you can easily calculate whether or not it would be worthwhile when compared with leaving the balance on a higher-rate card.
Some providers offer a ‘life of balance’ deal, and others make their offer for a fixed period of time, such as one or two years.
One of the essential aspects of repaying debt quickly, and reducing the amount of interest, is trying to cut down your non-essential expenditure each month and focus on debt repayment.
If your income increases, again the extra amount can be put towards the most expensive debt, so you gain inroads to your overall plan of putting your financial life on a sound footing.
If you’re struggling to repay debt and are looking for professional advice, call our experts at Scotland Debt Solutions. We work solely on behalf of Scottish residents in debt, and can provide the support you need to escape the debt spiral. Call the team for a free same-day appointment to discuss your needs.
If you live in Scotland and have been forced to work from home during the Covid-19 pandemic, you may be entitled to claim tax relief on your increased costs.
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Our Scottish based team can help advise you on your debt problems.