How shifting debt around can help to save you money

Author: Brian Weaver

If you are one of the many millions of people that have accumulated debt over the course of your life, then paying it off is unfortunately unavoidable. You will not only be covering the initial amount borrowed – but also the interest that builds up on the amount from month to month. It may seem like there is very little you can do to improve the situation, however, simple changes to how you manage your debt may see you saving a large sum of money overall. In particular, many people shift their debts around to make the most of competitive rates. Here are our tips on how you can do the same.

Put a plan in place

Brian Leslie, managing director of Prima Finance, a debt solutions company, said the first thing you should do is draw up a weekly or monthly budget.

“When you have an idea of your monthly incomings and outgoings, then you can see what is left over to service your debts,” he said.

If you have cash to play with each month, you could pay off your debt faster, added Leslie.

“If you have insufficient funds, it’s about trying to prioritise what debts are more important,” he said. “The priority has to be the secure debts; take care of the family home. Try to negotiate with your other lenders.”

Pay off the most expensive debt first

A general rule of thumb is to pay off the high-interest loans quicker — because they eat into your cashflow.

The Central Bank report found that credit card and overdrafts had the highest interest rates, which averaged out among the main financial institutions at 14.9%. Term loans, both secured and unsecured, have interest rates of 10.2% and 10.4% respectively. This compares with interest rates of less than 1% to just below 4% for mortgages.

“If you have credit card debt, you could be paying up to 20% interest,” said Steven Barrett, managing director of Bluewater Financial Planning. “You’ve got to work on personal or unsecured loans because the interest rates tend to be higher.”

Brendan Burgess, of consumer forum, said it was vital to understand your credit card debt.

“What are the rules that allow you to get it interest free? If you pay off the balance in full and on time, you won’t get charged interest,” he said. “Instead of paying the minimum amount each month, try to pay your balance in full and on time — if you can.”

The snowball effect

Eoin McGee, principal of Prosperous Financial Planning, prefers the snowball method as a debt reduction strategy. Here, you pay off your debts in order of the smallest to the largest, regardless of the level of interest.

For example, if you owe a family member €1,000 interest free, have a two-year term loan of €3,000 and a credit card debt of €5,000, you start by paying back the lower amount: the €1,000 interest-free loan.

You start with the smallest debt and work your way up. When the smallest debt is paid off, you roll the money you were paying towards that on to the debt of the next smallest loan and so on.

McGee said there were psychological benefits to the snowball method; by clearing the small debts quickly you will feel like you are on top of things, and ultimately stay engaged with the debt management process longer.

“You get the wins quicker, so that it has better overall outcomes,” he added.

Be disciplined

Barrett said if your goal was to pay down your debt, you should be disciplined. Not unlike savings, it can be a habit. “Don’t say, ‘If I’ve a few quid at the end of the month, I’ll throw it on my credit card,’” he said. “If your goal is to clear a loan quickly, there should be a direct debit going towards that loan — even if it is your credit card — the day after payday.”

Too many people leave their credit card payments until the end of the month, when resources are dwindling.

“It’s always a tedious discussion but people need to rein back their living expenses,” said Leslie.

Overall, it seems that there actually many ways to improve your financial situation in regards to shifting your debt around. From having a thorough plan to paying off the most expensive debt first, there are simple tricks that can save you money.