Payment Strategies

Payment Strategies are about becoming debt free without restructuring your finances. Payment Strategies are the main tool of financial counsellors.  These strategies work best with credit card debt. If you have personal loans, there maybe a penalty for paying out early which counteracts any savings. If you have both, there are still benefits to Payment Strategies.

Payment Strategies are ideal for people who are repaying their debts but have money left over. Payment Strategies help you to save interest and become debt free faster. If you have no money left over and can’t make payments on your debts every month, Payment Strategies are not 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: Three Debts

  • Credit Card A – balance $1000.00 – Rate 27% – Repayment $30.00
  • Credit Card B – balance $2000.00 – Rate 10% – Repayment $40.00
  • Credit Card C – balance $2500.00 – Rate 15% – Repayment $50.00

Results

  • Time until debt free: 79 Months
  • Total paid: $8415.00

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

  1. List all your debts in ascending order from highest interest to lowest interest;
  2. List the minimum repayment on ALL DEBTS;
  3. Determine how much money you have left over after your minimum payments;
  4. Pay the minimum repayment plus the left over money on the highest interest debt;
  5. 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;
  6. Continue until all debts are repaid.

Payment Strategy 1 Example: Three Debts

  1. Credit Card A – balance $1000.00 – Rate 27% – Repayment $30.00
  2. Credit Card B – balance $2000.00 – Rate 10% – Repayment $40.00
  3. Credit Card C – balance $2500.00 – Rate 15% – Repayment $50.00
  • Total available for debt repayment is $130.00 a month
  • Total minimum repayments $120.00
  • Surplus = $130.00 – $120.00 = $10.00

Under the High Interest Strategy, the repayments would be as follows:

  • Credit Card A Repayment $30.00 + $10.00 (surplus)
  • Credit Card B Repayment $40.00
  • Credit Card C Repayment $50.00

When Credit Card A is Repaid

  • Credit Card B Repayment $40.00
  • Credit Card C Repayment $50.00 + $10.00 (surplus) + $30.00 (Card A min)

When Credit Card B is Repaid

  • Credit Card B Repayment $40.00 + $10.00 (surplus) + $30.00 (Card A min) + $50.00 (Card C min)

Results

  • Time until debt free: 60 Months
  • Total paid: $7782.00

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

  1. List all your debts in ascending order from lowest balance to highest balance;
  2. List the minimum repayment on ALL DEBTS;
  3. Determine how much money you have left over after your minimum payments;
  4. Pay the minimum repayment plus the left over money on the lowest balance debt;
  5. 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;
  6. Continue until all debts are repaid.

Payment Strategy 2 Example: Snowballing

  1. Credit Card A – balance $1000.00 – Rate 27% – Repayment $30.00
  2. Credit Card B – balance $2000.00 – Rate 10% – Repayment $40.00
  3. Credit Card C – balance $2500.00 – Rate 15% – Repayment $50.00
  • Total available for Debt Repayment is $130.00 a month
  • Total minimum repayments $120.00
  • Surplus = $130.00 – $120.00 = $10.00

Under the Snowballing Strategy the Repayments would be as follows:

  • Credit Card A Repayment $30.00 + $10.00 (surplus)
  • Credit Card B Repayment $40.00
  • Credit Card C Repayment $50.00

When Credit Card A is Repaid

  • Credit Card B Repayment $40.00 + $10.00 (surplus) + $30.00 (Card A min)
  • Credit Card C Repayment $50.00

When Credit Card B is Repaid

  • Credit Card C Repayment $50.00 + $10.00 (surplus) + $30.00 (Card A min) + $40.00 (Card B Min)

Results

  • Time until debt free: 61 Months
  • Total paid: $7815.00
  • The Payment Strategy we recommend is Snowballing. Mathematically, it isn’t the best payment strategy, but becoming debt free is one part math and nine parts psychology.