What debt should I pay off first?
When you have a tsunami of debt with multiple creditors it can be difficult to know where to start and which debt you should pay off first.
The core principle is to pay off debt that costs the most, often it has the highest interest rate but sometimes the answer isn’t so black or white. For example, if you have fallen behind on payments for essential living expenses – these should be top of the debts-to-pay-off-fast list.
Debt of living
We all need shelter, food, water and some essential services and the Debtfix Navigators recognise that the basic costs of living are beyond many New Zealanders.
That’s OK and we are here to help.
If you are swamped with money problems the first priority must be your rent, power, water and food and we can help you make sure these are paid – even if you have fallen behind on payments.
As soon as you think you will have problems making payments you need to contact your landlord or the utility supplier. They will often work with you to create a repayment plan and if you don’t feel confident doing this your local budget service or Debtfix can help you.
Sometimes Work and Income can assist with urgent housing and living expenses, too.
Debt that helps you earn
It is common to borrow money to buy, maintain or repair items that are essential for you to earn money, such as a car for travelling to work or tools for a tradesperson. It makes sense to prioritise these debt repayments, especially if there is no alternative like using public transport or carpooling to get to work.
If you owe money for supplies that are essential for your business, such as a plumbing or bakery ingredients wholesaler – you need to make paying them a priority. If they stop your credit you are out of business.
Pay off highest interest debt
It makes sense to pay off the debt that costs you the most money, which is commonly that with the highest interest rate. However, you need to consider how long you are making repayments for because a debt with small repayments spread throughout many years could cost you more. For example, a mortgage on your home may have a relatively low interest rate but because you make repayments for many years – the total cost of the debt can be large.
This is exacerbated if you chose to take a payment holiday, see the Debtfix blog, Look before you book a mortgage holiday.
Debt consolidation
Putting all your debt into one basket at a favourable interest rate can reduce the stress of repaying multiple organisations and the monthly repayments may be more manageable for you. Have a look at the current information from Good Shepherd about their debt consolidation offer.
However, debt consolidation is not a magic wand that makes that debt disappear and you still need to commit to payments. The interest rate may be lower than the rates paid for some loans such as credit card debt, but this is not always the case – so check the interest rate. Also, when you make payments for a longer period – the total amount you pay for the debt can be more, as mentioned earlier.
Fees can sometimes be higher for debt consolidation loans, so people need to completely review and understand the terms and conditions of the contract they are entering.
Pay back debt that just bothers you
Some debts you choose to repay may not be the ones that cost the most, but they are the ones that bother you the most. Maybe you borrowed money from family or friends and they are not charging you interest but you would prefer to pay this debt as soon as possible. For some of us, owing money to a mate or our mum can make us feel a bit guilty and obligated to get that debt sorted to prevent the financial transaction from having an impact on our relationship.
Then there is the debt you may owe to a small business owner, maybe the plumber or baker mentioned earlier. Paying their bill could make a big difference to their cash flow and the survival of their business, which puts food on their family table, so it seems ethical to repay that person quickly. If you are going to have to cross the street in shame every time you see that business owner – the ethical cost is probably greater than the interest rate on debts owed to big corporations.
Debt repayment that gives a sense of achievement
Smashing the payments for a small debt can give you a sense of achievement and relieve the stress of borrowing. For example, maybe you only owe a small amount for your smartphone and paying it off in full might make you feel better because you can tick that item off your list of debt repayments.
Make a debt repayment plan with independent advice
If debt is keeping you awake at night and you feel like you can’t see a way out of the storm – it is time to talk with someone for independent advice and support.
Debtfix Navigators will look at your complete financial situation, they will stop you from sinking and they can teach you how to stay on the right side of money matters. The crew is independent from your family and friends and they provide solutions without judgement and everything is confidential.
Contact a Debtfix Navigator, now.