Making a plan

In this video, we’ll look at how to plan to pay off or reduce your non-priority debts like your credit cards or a personal loan. If you’d like more details on priority and non-priority debts, please look at our video called ‘priority debts’.

For members of the armed forces community, debts can sometimes build up around moves, deployments, changes in posting or transitions back to civilian life. Whatever your situation, making a clear plan can help you regain control.

If you have lots of debt with different providers don’t worry, you’re not alone and help is available. You may be thinking “I don’t think I’m ever going to get there, it’s impossible.” But it’s not, and with some careful planning and the right support, you can achieve your goals.

There are two key methods to reduce debt: the snowball method and the avalanche method.

These will only work if you’re honest with yourself. Be realistic about what you can spare each month. Even small amounts add up over time. The most important thing is not to take on any new debt while you’re paying these off. Let’s look at how each one works.

With the snowball method, you start by listing all of your debts, from the biggest to the smallest balance. Then you set up direct debits to pay the minimum payments on every debt. This is how you stop yourself from falling behind or getting into any trouble with any of your lenders.

Next, you pick the smallest debt you have and you make the maximum extra payments you can afford towards that. The idea is you pay off that smallest debt as quickly as you can. You then ‘snowball’ onto the next step.

Remember, you’re paying all the minimum amounts on all of the debts you have, but now you’ve paid off one of those, you have that minimum payment, plus the maximum extra payment you can afford to direct to the next debt in line. This ‘snowballs’ as you keep clearing debts faster.

The snowball method is best for those who want to feel the progress of paying off debts completely, as regularly as possible. It can feel like a slog, so make sure to celebrate every small win. When a debt is cleared, take a moment to acknowledge it and congratulate yourself for being a step closer. Financial progress boosts motivation.

Another strategy is the avalanche method. The avalanche method is best for reducing the cost of borrowing as quickly as possible, by getting rid of the debt that is growing the fastest.

For this, you need to list your debts from the highest interest rate to the lowest.

Again, you need to set up the minimum payments on every debt, so you don’t get into any trouble with lenders. This time, you target your extra payments at paying off debt with the highest interest rate first.

For example, you might have a credit card balance of £700 charging 25% APR. You may also dip into an overdraft by around £200 each month, which charges interest at 34 to 40% plus a monthly fee. And you might also have a much larger personal loan of £7,500 at 12.9% APR.

Put another way: even though the personal loan is bigger, the overdraft or credit card could actually be costing you more month to month because of the higher APR and fees. Understanding this helps you see which debt needs your attention first. Once you’ve paid that one off, you move on to the balance with the next highest interest rate. Keep going until you’ve paid off all of your debt.

Whichever method you choose, it only works if you don’t add new debt. Try leaving credit cards at home or taking them off your phone wallet.

Watch our budgeting videos for more tips on how to reduce spending. You’re not alone. Lots of people struggle with debt. There are resources available and you can get help.