Five Ways to Pay off your Debts

As we begin a new year, and set new resolutions for the year, many will make their target for 2021 to pay down their debts.
We, therefore, look at five ways that you can pay down your debt.

The Snow Ball Approach

The Snowball approach is a simple one. It involves you paying down the debts that you are paying most for, first. The idea is to reduce how much your debts are costing you each month.


Normally, this will mean paying off the ones with the highest rates of interest first, but not always.

Sometimes, even debts with lower levels of interest can cost you more each month, if the balance is higher.


You still must pay all your ongoing liabilities as normal, such as your gas, electricity, council tax, rent, or mortgage.


You must also make sure you pay the minimum amounts towards your other debts each month, before you pay everything else to your most expensive debt.


As you pay off each debt, you move onto the next one, until you have none left.

The Money and Balance Transfer Approach

The Money and Balance Transfer Approach is a form of refinancing and involves using credit cards, so is only likely to be possible if your credit rating is good enough to successfully apply for a credit card. Alternatively, you may have one that you have not used.

A Balance Transfer is when you transfer one credit card balance over to another credit card, to take advantage of an interest free period.

A Money Transfer is similar but involves transferring cash from a Credit Card over to another account, such as an overdraft and using that to pay off the balance on the other account.

Again this is with a view to taking advantage of an interest free period.

The two things you must watch for is there will normally be a transfer fee, that will be a percentage of the money you borrow. You just need to make sure that will not be more than you will pay in interest if you do not transfer the money or balance. You also must make sure you use the interest free period to reduce your debt and stop using credit.

The Consolidation Approach

The next approach is a common one, and that is to consolidate your debts, so you make only one payment each month.


This involves taking out a loan to repay all your other debts. You then just have one debt to pay each month.


The problem with this approach is you can end up owing more, even if you do not borrow any more than you owe. The problem is you will have to pay the interest on the loan, which means you will likely have to repay more than you originally borrowed.


Also, the danger is if you keep borrowing from other sources of credit, such as credit cards and overdrafts, your debts can quickly become a problem again.

The consolidation Loan approach can help you deal with your debts, but it is also the one that is most likely to fail if you do not address the underlying reasons why you were using credit in the first place.

The Incremental Approach

The Incremental Approach is like the Snowball Approach, but in reverse. The idea is also to achieve the same outcome as the Consolidation Approach, only having one debt to pay, then none.

The way the Incremental Approach works is you pay off your smallest debts first, then when that is paid off, move onto the next one. This may be more costly than the Snowball Approach, but you will reduce the number of debts you have sooner, which can sometimes make it easier for people to manage their monthly payments.

You still must pay all your ongoing liabilities and maintain minimum payments to all your other debts.

The Formal Debt Solution Approach

The Final option is to seek advice from an advice agency and use a formal debt solution.

This can mean the Debt Arrangement Scheme, a Protected Trust Deed, or a Sequestration, which is the name for Bankruptcy in Scotland.

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