Step 1: List what you owe
Write down each debt with its balance, interest rate and minimum repayments. Your statements and loan contracts show the rate. For example:
| Debt | Balance | Interest rate | Minimum a month |
|---|---|---|---|
| Credit card | $6,000 | 22% | $180 |
| Car loan | $9,000 | 8% | $280 |
| Personal loan | $2,000 | 10% | $90 |
That’s $550 a month of minimums. Say you can pay $200 more, $750 a month in all.
Don’t forget buy now, pay later plans, overdrafts and money owed to Inland Revenue or Work and Income.
Step 2: Pick a method
Both methods pay the minimum on everything and put the extra on one debt. When it’s paid off, its payment rolls onto the next.
- Avalanche: the highest interest rate first (here, the credit card). It costs the least.
- Snowball: the smallest balance first (here, the personal loan). You clear a debt sooner, which keeps many people going.
Worked out month by month, as in our debt payoff calculator.
The difference between the two methods is small here. What matters most is paying more than the minimums, and keeping at it. Try your own debts in the debt payoff calculator.
Step 3: Pay less interest
- A balance transfer card moves card debt to a card with a low rate for a set time, usually 0% for about 6 months in New Zealand. The rate then jumps, so pay it off before then.
- A consolidation loan from your bank or a credit union can replace several repayments with one. Standard credit cards often charge around 20% to 21% a year, and bank personal loans around 12% to 14% for people with good credit. It only helps if you don’t run the cards up again.
- Ask for hardship help: under the CCCFA, you can ask your lender to change your repayments if illness, losing your job or another reasonable cause means you can’t keep up.
Step 4: Find more to pay
- Make a budget and give the extra a fixed amount each week or month. The budget calculator shows where your money goes.
- Put windfalls on the debt: tax refunds, bonuses and gifts.
- Stop adding to it: take the card out of your phone’s wallet, and pay by debit card while you clear it.
- Check the help you can get, such as Working for Families or the Accommodation Supplement: see help you might be missing.
Step 5: Stay out of debt
Once a debt is gone, keep paying the same amount into savings. An emergency fund means the next surprise bill doesn’t go back on a card. Paying on time also builds your credit history: see credit scores explained.
If you can’t keep up with your payments, get free help early from MoneyTalks (0800 345 123): see help with debt.