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Looking at your interest rates on your debts, you’ll probably see the some of them are around 10% pa (per annum or per year), and others such as store cards go as high as 28% pa. This means that if you have $1000 outstanding on a store card at 28% pa for one year, you’ll pay $280 – nearly 1/3 of the total debt!
Now, this example isn’t totally accurate as you will have made some repayments throughout the year, but hopefully it gives you an idea that the higher the interest rate, the more expensive the debt is – even if you only owe $50.
Store cards in particular can be very nasty. They often quote very low minimum repayments which make them see affordable, but in reality your minimum repayment is mostly going towards paying the interest, and not much off the total balance. In other words, you end up giving more of your money away using these cards than with most other credit cards/loans.
Ok, so now we need to prioritise your debts based on their annual interest rate, not their outstanding balance. The reason for this is that we want to reduce the amount of money being paid on interest as quickly as possible.
Once your list is in order with the highest interest rate at the top, this top item now becomes your number one priority. Any spare money you have (bonuses, tax refunds, gifts of money) need to go against this debt. Whilst doing this, keep your other debts at their minimum repayment levels only to maximize the amount of money you can put against your most expensive debt.
