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3 debt repayment strategies to get out of debt

Debt repayment can feel like an uphill battle, but with the right strategies, you can make significant progress. Whether you’re dealing with credit card debt, personal loans, or medical bills, there are options available to help you pay off your debts faster and more efficiently.

At MyBudget, we help thousands of people overcome debt and financial hardship. Many Australians find themselves in unmanageable debt quicker than they expect because, as we all know, it’s often easier to accrue debt than it is to pay it off. In this article, we’ll explore three effective debt repayment strategies that can help you regain your financial freedom.

The three best debt repayment strategies

To help you find the best debt repayment strategy for your circumstances, there are three common types of debt management methods:

  • The Avalanche Method
  • The Snowball Method
  • The Feel Good Method

If you’re looking to reduce your debt stress, you need a well-formulated plan that works for you. Budgeting is great, but if it doesn’t suit your lifestyle, financial circumstances, or goes too big too early on repayments, you’re much less likely to stick to it.

What is the Avalanche Method?

The Avalanche Method is the process of paying down the most expensive debts first (here are six steps to lower your credit card debt) with additional voluntary repayments on a monthly basis. These are the loans that attract the highest rates of interest. Credit cards are likely targets, as are store cards, revolving lines of credit and quick cash payday loans.

While meeting your commitments and making minimum payments on your other debts, focus all of your spare cash on paying down the one that has the highest interest rate and the harshest rate terms. Once that bad debt is paid off, you can then focus your extra repayments on the next most expensive one and so on.

This strategy is great for debt reduction because it minimises the amount of interest you pay over time. But the challenge of the Avalanche Method approach is that it can take a long time to feel like you’re making any progress. If your current loan balance is sizable, most of your regular payments throughout the loan term will be taken up by interest charges. If you’re currently under a lot of stress and pressure, or you’re someone who needs to see progress quickly in order to stay motivated, this may not be the strategy for you.

What is the Snowball Method?

The Snowball Method has you focus all of your spare cash on making extra loan repayments towards your smallest debt first, regardless of the rate of interest it attracts. When that debt is paid off, move to the next biggest, and so on. This is while you continue meeting your commitments and making minimum payments on your other debts, of course.

The Snowball Method gets its name because it gains momentum as smaller debts are paid off and the repayments are applied to larger debts. Along the way, you get to cut up credit cards, close accounts, celebrate milestones and ultimately, reduce your credit card debt stress.

A couple sitting at a desk discussing Non-Confirming Loans

For people with a lot of debt, for example, the Avalanche Method could feel like the equivalent of going to the gym for months on end and never seeing any real progress. It would be easy to lose faith and slide back into old habits. You may be making extra loan repayments, but it may not feel like it. After all, financial fitness is just like health and fitness, it requires long repayment term habits that stick.

Money is the same. That’s why sometimes coping with debt stress may be made easier by focusing on smaller debts first, even when they aren’t the most expensive ones. This is the best debt repayment strategy if you like getting ahead and experiencing the joy of progress.

What is the Feel Good Method?

While meeting your commitments and making minimum payments on your other debts, the Feel Good Method has you focus all of your extra cash on paying off the debt that will make you feel the best when it’s gone. When that debt is paid off, move to the next that will make you feel the best, and so on.

If you’re overwhelmed by how to get out of debt, it might be because there are a lot of emotions tied to loan repayments. An often overlooked factor is how your debts make you feel.

While you’re struggling to cope and finding yourself in times of personal distress, this can be an excellent strategy. It helps you to rebuild stressed relationships, allowing you to think with a clearer mind. After all, whatever your financial goals are, the end goal is not a physical destination or object, it’s a feeling – a feeling of freedom, security, calm, relief, and being free from money worries. As long as you’re up to date and making regular payments on your creditor debts, you can make priority payments like these first to ease your mind.

There are various loan types, including unsecured and secured loans, but not all debts are with creditors. Common assumptions about repayments are that you need to pay off the most financially damaging ones first, but this may not always be the case.

Money can be highly emotional, especially when relationships are involved. Sometimes this means the best debt repayment strategy is to focus on paying off the debts that make you feel the worst. It might be $1,000 you owe your grandmother or a credit contract on a phone you lost six months ago.

Be sure to check out our loan repayment calculator here.

What can cause financial stress?

As of July 2023, a Finder survey reported that there are over 13 million credit cards in circulation in Australia with an average balance of $3,018. This helps to explain why credit card stress is a leading cause of financial stress, but it’s not the only one.

Mortgage stress is also on the rise and household debt has doubled in relation to annual household income over the last 20 years, making Australians some of the most indebted people in the world. Interest rate home loans have also been skyrocketing recently due to the Reserve Bank of Australia (RBA) attempting to curb the rate of inflation.

The truth, however, is that any loan type and level of debt can cause stress. Personal debts, such as car loans, buy-now-pay-later debts, such as Afterpay and interest-free consumer loans, even informal loans from family and friends, can all be debts to lose sleep over.

Meet Megan and Creagh, who found themselves deep in debt

Megan and Creagh are in their 30s, married, living in Sydney and both have steady jobs. By all accounts, they’re an average couple, except for the fact that they ended up with an above-average amount of credit card debt. As previously mentioned, the average Australian credit card balance is around $3,000, while Megan and Creagh’s cards added up to a heart-pounding $91,000.

We want to tell you Megan and Creagh’s story to show you that with a good debt strategy and a budget, you’ll be able to see the next 12 months of estimated repayments, and when you have clarity, anything’s possible. They weren’t sure how to get out of debt, but with a little help from MyBudget and the best debt strategy for them, they’re now living stress-free.

3 debt repayment strategies to get out of debt

Stuck in an endless loop of interest-free credit cards

“It wasn’t big lavish expenses that got us into trouble – it was day-to-day stuff,” says Creagh.

The couple admits that they regularly overspent on little things – such as going out to eat instead of cooking at home – that added up to a lot over time.

And when their credit card debt balance got too high to handle, they took out new cards with zero-interest balance transfers with competitive comparison rates, only to end up with multiple cards with multiple balances generating high amounts of interest.

“What we were doing wasn’t working and we weren’t sure how to get out of debt,” says Megan.

How MyBudget helped them find the best debt repayment strategy

Megan and Creagh decided to approach MyBudget. One of our Money Coaches went through their finances in detail and designed a customised plan that mapped out all of their income and future payments over the next 12 months. Any unexpected additional income could also fall into an Available Balance, allowing them to cover those additional costs that life sometimes seems to throw.

Both of them were surprised by how far their money could actually go, allowing them to make additional repayments on top of their current repayment plan, ultimately minimising the interest rate periods that once had no end in sight.

With our help, Megan and Creagh paid off $60k of debt in 10 months

Our plan ticked all of their boxes by taking into account the strategies mentioned above: those debts that were costing the most, those that could be paid off quickly and those that would feel great to get rid of. Making extra monthly repayments, fortnightly repayments or even weekly repayments in addition to your compulsory repayments often don’t come with additional repayment fees, so making more than the required monthly payment was their best way to get ahead.

Creagh says, “We told MyBudget what we wanted to try to keep a hold of and they built the plan around that.”

The best debt repayment option was one that meant they didn’t have to sacrifice their entire lifestyle to pay down their debts. They could make regular payments, not fall behind and not lose the lifestyle they’d been able to achieve.

Megan and Creagh now have structure to work within. They still eat out regularly, but their spending now has limits and their income is organised into streams that take into account all of their future expenses and savings. By sticking to the plan, they know exactly how and when they’ll achieve their financial goals.

The result? Megan and Creagh have been able to pay off five credit cards in 10 months (about $60,000) and now have their sights set on a house deposit.

“I’m so proud of us and what we’ve done together, that’s a big deal for me. It’s a feeling of elation. I can breathe out,” says Megan with a smile.

Being able to make additional payments in addition to their regular payments was a dream come true for Megan and Creagh. They were able to increase their frequency of payments, and this was thanks to a budget that is based on ensuring priority payments are being made, so they never went without.

Does this sound familiar?

If you’re coping with debt stress and can’t work out how to find space to make extra repayments in addition to your compulsory repayments, we’re here to help. MyBudget may even be able to contact your creditors to discuss potential payment arrangements and extended repayment plans.

To enquire about a customised strategy that works for YOU, call MyBudget on 1300 300 922 or enquire online for a free appointment.

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This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.