How to get out of debt faster

With a ‘debt avalanche’, you pay off the debt with the highest-interest rate first. When you finish that, you move on to the next most-expensive one, then the one after that. Rinse and repeat.

The avalanche is the quickest way out of debt, mathematically speaking, since you are getting rid of the debt that is most expensive. When you do, you have more money to funnel towards your other debts.

But if you are running some high balances, it can take grit and determination to see it through. If you find paying off large loans daunting, consider ‘snowballing’ your debts instead.

With a ‘debt snowball’, you instead pay off the debt with the smallest balance first. Once that’s out of the way, you take your extra money and aim it at the next-smallest balance. Again, rinse and repeat.

Knocking off the tiny ones first gives you motivation and momentum. Quick wins are satisfying!

Now snowballing your debt isn’t always the quickest or cheapest way out, but you may find it easier to build up momentum and make it to the finish line being debt free.

Or you may want to start with a snowball to get rolling and then start your avalanche later on. Whichever works for you!

What can help most is a budget, a buffer and a strategy. A budget is a plan for your spending. It’s a big help when you’re directing your money towards a goal like being debt free. Before you tackle your debt, save an emergency fund of $1000 while you keep making minimum payments. Our Buffer builder app can help. Without a safety net, if something happens, you’d have to run up your debt all over again. Finally, you can consider ways to tackle debt, or debt consolidation. Find out which will work best for you.

Saving for an emergency fund of $1000 is a great place to start, and then tackle all high-interest debt you’re carrying. When you pay down debt first, if an emergency pops up, you could end up borrowing more. With an emergency fund, however, you can handle those unexpected events like a car repair or trip to the vet, without sliding further into debt. The goal is to get out of debt for good, so here’s more on starting your safety net. 

Aiming to be debt free? It’s the high-interest debt that hurts most: payday loans, credit cards, store cards, car loans. That’s what we’re after first. When you have a number of loans on the go, there are a couple of strategies that help to take them down. The first is a ‘debt avalanche’, where you list all your debts and target the highest-interest loan first (the most expensive). The second is a ‘debt snowball’, where you start with the smallest loan. Find out which could work for you.

And remember you’re not alone in this: help is at the ready. Reach out to the team at MoneyTalks, even anonymously, on 0800 345 123, help@moneytalks.co.nz or text 4029. 

Managing our borrowing well can increase our score. Credit reports record any missed payments (defaults) and how long they are overdue. Defaults can stay on your report for up to five years. They also can show how much we’ve borrowed and whether we’ve made regular repayments or not. Our credit history also shows how often we’ve applied for loans, and too many enquiries can push our scores down. You can get your credit report for free by requesting it from each of the three credit reporting companies (Centrix, Equifax and Experian). Here’s where to find out more. 

Sometimes you may have to, but here’s the thing. Paying the minimum means you’ll pay the maximum in interest. (Unless you default and miss repayments entirely, in which case it will get even more expensive.) It can also mean years of repayments. In one Sorted example, minimum payments on a $12,000 credit card and a $6000 car loan would take six and a half years. They’d cost $12,347 in interest. For every dollar you pay above the minimum, you’re cutting down your interest costs and reshaping the debt in your favour.

Wrapping all our debts together and paying them off at once – ideally at a lower interest rate so we get out faster – can be helpful. But the key is to leave borrowing behind! Many times we’ve seen that consolidating debt into a single loan, while it seems like a good idea financially, in practice leads to more debt. Aim to close out your old credit cards and other ways of borrowing so you don’t rack them up again. Here’s how to make debt consolidation work for you. 

Finding it hard to make your next loan repayment? Talk to your lender straight away. If something unexpected has happened, like illness or losing your job, you can ask them to change your loan. This is called a hardship application, and they can’t increase your interest rate because of it. 

If you fall behind on repaying your loan, you can be charged penalties in the form of fees or a higher interest rate. Your late payments will be recorded against your credit score (which affects your ability to borrow more someday). 

If your lender turns down a hardship application, you can complain to their dispute resolution scheme. And it helps to have someone in your corner. MoneyTalks is worth reaching out to for support.

If a debt isn’t repaid, the lender may pass it to a debt collector, or sell it to one. Debt collectors must not mislead you, harass you or pressure you into paying. For example, they can’t contact you at unreasonable times, or when you’ve asked them not to. If you do get caught out with a debt collector, it helps to have someone in your corner. The team at MoneyTalks is worth reaching out to for the support you need. 

One of the most important things that mortgage lenders look at is how much income you have free in order to make loan repayments. With too much debt, a lot of your income is already committed to other loans, and there’s only so much to go around. Even if you’re not using all of your credit limit, it’s important to know that the lender will assess you as if you are. They will also look at your credit history, and how well you’ve repaid other loans. In the end the lender may decide to lend you less, or nothing at all. Here’s more on what to expect to borrow when you’re buying a home.