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Guidance

What's the best way to pay off your debts?

What's the best way to pay off your debts?

Getting back on top of your finances can be challenging - the key is to choose the path that's right for you by working out which strategy best suits your needs.

Whether it’s the aftermath of a big trip overseas, an unexpected emergency or spending a bit more than you earn for a period of time, there are many ways you can fall into the red. And if you’ve got a few different debts, it can feel like you’re never going to break free.

But getting back into the black doesn't have to be daunting. Whether it's the "avalanche" or "snowball" method, there are a couple of strategies that can help you get your debts back under control.

How do you set a budget?

An online tool such as the CommBank budget planner can help you work out how much money you’ll have available to make repayments each month and then set a timeline for when you would like to pay all the debt back. Make sure it’s realistic and practical so that it’s not going to create even more stress by trying to stick to it.

Once you have a budget set, you can take some action in terms of deciding on a methodology like the avalanche or snowball methods so that you can get your debts down. It’s important to keep reviewing your spending and also not get too stressed if your budget blows out because things change all the time.

The avalanche method

If you have more than one debt, you may have one with a higher interest rate than the others. This means that this money is costing you more to borrow. Financially, it makes sense to pay off this debt first because it’s going to save you money over time.

How it works:

  • Order your debts from the highest interest rate to the lowest interest rate.
  • Make the minimum payment on each debt by the payment due date each month.
  • Use any extra cash you have available to pay off more of your debt with the highest interest rate.
  • Continue until all the debts are paid off, swapping the debt with the highest interest rate as debts are cleared.

The snowball method

For some people it’s not the amount of debt they have, it’s the number of debts. This means it may work better for you to pay off the smallest debts first to reduce the number of debts you have faster.

While this may not be the most efficient method from a purely financial perspective, it can be an easier way to escape the debt cycle because the progress is more visible.

How it works:

  • Order your debts from smallest to largest in terms of money owed.
  • Make the minimum payment on each debt by the payment due date each month.
  • Use any extra cash you have available to pay off more of your smallest debt.
  • Continue until all the debts are paid off, swapping the smallest debt as each is cleared.

Debt consolidation

Rather than tackling a series of large or small debts, you may prefer instead to consolidate them into a single debt. This may save you on interest and fee payments, as well as provide greater certainty and flexibility with your repayments.

Once you have a target and strategy in mind, you can set points along the way where you’ll celebrate milestones. This may be getting your overall debt down to a certain figure or reducing the number of debts you have in total.

If you need further help with your debts:

  • Contact us today on 13 14 31 to explore your options with one of our personal lending specialists.

Note: CommBank can also advise and support our customers with any difficulties that arise from a change in their financial situation.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.