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Paying more than the minimum required balance each month is crucial if you want to decrease your debt and reduce the amount of time it takes to pay it off. When you only make the minimum payment, you are essentially just covering the interest charges on the capital amount, which means you are not making much progress in reducing the actual debt itself.
By paying more than the minimum, you are able to chip away at the principal balance, which in turn reduces the amount of interest you are charged over time. This can save you a significant amount of money in the long run and help you pay off your debt much faster.
It may require some sacrifices and budgeting to be able to pay more than the minimum each month, but the benefits of doing so far outweigh the temporary discomfort. Consider cutting back on non-essential expenses or finding ways to increase your income in order to free up more money to put towards your payments. In the end, you will be glad you made the effort to pay more than the minimum and will be on your way to financial freedom sooner than you think.
One debt management plan you can use to reduce your debts is the snowball method.
With the snowball method, after listing your debts, identify the one with the smallest balance and work on paying off that first.
What does this look like in practice?
Pay the minimum balance on all your debts except the one with the lowest balance. For this one you want to use any extra cash that you have available to pay it up. This is when you want to put into practice the “paying more than the minimum balance” strategy.
Once you’ve paid off your smallest debt, identify the next smallest one. Use the cash that you have been paying on the previous debt + the minimum amount you have already been paying on the new smallest debt. Do this until you have paid up all your debts.
List of debts:
One: R2500 (minimum balance is R330)
Two: R5100 (minimum balance is R650)
If you have an extra R170 each month, use the debt snowball strategy. This means you will make monthly payments of R500 (R330 + R170) towards your first debt, called One, until it is fully paid off. Once you pay off One, you can take the R500 you were paying and add it to the minimum payment for your second debt. This will be your new monthly payment for the second debt. So, after paying off One, your new monthly payment for Two will be: R500 + R650 = R1150. You should pay this amount each month until Two is completely paid off.
If you are someone that needs to see progress fairly quickly to keep going, this method might be for you.
With the debt avalanche method, you focus on identifying high interest debt first.
Once you have identified the debt with the highest interest rate, you need to use all your extra cash to pay more than the minimum balance required on this debt. After settling this debt, you move on to the next debt with the highest interest rate until you have settled all your debts.
The downside of this method is that it requires a lot of discipline and you often have to keep going without seeing significant changes. If you are someone who doesn’t need incentives to keep going, and you can keep focused on your long-term goal, this method could be for you.
Example
List of debts:
One (store card): R2500 at an interest rate of 21% (minimum balance is R330
Two (credit card): R5100 at an interest rate of 23% (minimum balance is R650)
Three (store card): R1300 at an interest rate of 20% (minimum balance is R110)
Based on this scenario, you would want to tackle Two first because it has the highest interest rate.
This means that you will use the R170 extra cash you have available and add it to the minimum balance of Two. Your new monthly installment for Two will be R820. You will pay this until you have paid this debt in full and then move on to One.
Moku Tip: Did you know that store cards usually charge a higher interest rate compared to credit cards? Be careful of buying big purchases with your store cards as you could be paying more in the long-run.
A debt consolidation loan is a way to consolidate all your debt and pay one monthly installment by taking out one larger loan.
What’s important to note is that this loan only covers unsecured debt (debt that isn’t backed by an asset like a home or car).
How do you get a consolidation loan?
If you are interested in getting a consolidation loan, you would need to apply for it from a credit lender like any personal loan. Most banks offer this service. The bank will check your affordability and credit score and then determine whether or not you qualify for the loan. If you have a poor credit score, you might not be approved. If you are approved, you might be approved with a high interest rate.
If you are struggling to afford to pay your monthly payments, you have a poor credit score, and you have no extra money to put towards your debts, to get some debt relief you will want to consider debt review.
If you find yourself saying "I am in debt and have no money" this is another sign you may need this programme.
Debt review, also known as debt counselling, is a way to help you tackle your debt without taking anymore on.
How does it work?
You apply for debt review with a registered Debt Counsellor or debt counselling company (credit counselling agency). They will first determine whether or not you are over-indebted.
If you are found to be over-indebted, the Counsellor will work out a repayment plan based on your debt obligations and daily expenses.
The Counsellor will, during this time, approach your creditors for reduced interest rates for your loans.
You will then, like a consolidation loan, pay one reduced monthly installment for all your debt.
Debt review is a legally regulated process by the National Credit Regulator (NCR) and your repayment plan is granted by a Court Order and because of this, your assets like your home and car, are protected. This means that during the time you are under the process, your assets cannot be repossessed.
MyMeerkat FSP is an authorised financial services provider (FSP 50979). We are a registered Debt Counsellor NCRDC 2613 and have been voted as one of the top 10 Large Debt Counsellors in South Africa!