How to get your finances in order by managing your debt

Welcome to the second of our three-part series looking at how to get your finances in order. While this part, which focuses on tackling debt, can be read on its own, we recommend reading part one first if you haven’t already. OK, let’s get down to business.

• Part one – how to create a budget
• Part three – establishing good financial habits

Debt consolidation loans

Perhaps the most obvious first thought when it comes to paying off debt is a debt consolidation loan. A debt consolidation loan allows you to pay off multiple high-interest debts such as credit cards and car finance in one go and replace them with a single repayment at a lower interest rate.

The less interest and additional fees you have to pay, the quicker you’ll be debt-free.

Check your credit score first

Before you apply for a debt consolidation loan, it’s a sensible move to check your credit score. This is because a successful application depends in large part on having a good one. Also, your credit score is impacted every time you apply for a loan, so you don’t want to make a bad situation worse unnecessarily.

You’re entitled to a free credit report, which includes your credit score, every three months from any of the following credit reporting bodies (CRBs):

• Equifax
• Experian
• illion

Different CRBs may hold different information about you, so it’s worth checking them all.

However, there’s an elephant in the room here. Because credit scores are based on your financial circumstances past and present, a debt consolidation loan might not be a realistic option for someone experiencing financial difficulty.

Here are some of the factors which determine your credit score:

• Your current debt and how you’re managing your repayment obligations
• Your current credit limit
• Loans and (as mentioned above) loan enquiries you’ve taken out previously
• Difficulty repaying past debt
• Accounts you’ve opened and/or closed
• Court writs or default judgments against you or any history of bankruptcy

Alternative ways to accelerate debt repayment

If you don’t feel that a debt consolidation Ioan is appropriate, there are a couple of alternative strategies for accelerating debt repayment. These are known as the snowball and avalanche methods. Choosing the right one is largely a matter of psychology because while the avalanche will save you more money in the long run, it can be challenging to stick to. The snowball, on the other hand, creates a sense of positive momentum right from the start.

The snowball method

With the snowball method, you make a list of all your debts from the smallest through to the largest. Once you’ve factored in the expenses from your newly-optimised budget (see part one), you then throw everything you can spare at the smallest. When that’s paid off, you move on to the next smallest and so on. The ‘snowball’ effect of knocking over increasingly large debts creates an incentive to keep at it until you’re debt-free.

The avalanche method

The avalanche method, by contrast, involves sorting your debts from highest interest to lowest interest, and focusing on the highest first. A quick look at the maths confirms that this approach saves the most money… but it requires a considerable amount of discipline, which might not suit everyone.

If you’re unsure which method to go with, it’s worth noting that a team of researchers at a leading American business school found that “people with large credit-card balances are more likely to pay down their entire debt if they focus first on paying off the cards with the smallest balances — even if that approach doesn’t make the best economic sense.”

Don’t be afraid to ask for help

Unfortunately, there will be cases where it simply isn’t possible to make the numbers work. If you can’t find enough money to pay your bills and put food on the table, plus a bit extra to tackle your debt, it’s time to start talking to people who can help.

The National Debt Helpline is an excellent first port of call. Not only can you organise a free and confidential chat with a financial counsellor, but its website is also full of useful information.

It’s a good idea to reach out to your creditors too. It’s often possible to come to alternative repayment arrangements which give you a bit of breathing space. At the end of the day, organisations you owe money to would much rather hear from you than not.

And while it may not be your first thought, speaking to your bank is also a sensible move. You are, after all, a customer, and it’s in their interests to help you. Many banks, including Great Southern Bank, have some sort of financial hardship program . They actively want to help, so you shouldn’t feel worried or ashamed about getting in touch.

Establishing good financial habits

You don’t have to wait until you’ve cleared all your debts before establishing good financial habits. In fact, it’s best to start doing that as soon as possible. But you will have to wait for the final part of this series to read about it! See you next week for part three.