You will be able to pick a repayment order for several debts and explain why you picked it.
When you have more than one debt, you have to decide which one gets the money you pay above the minimums. Once your repayment line is set, the total you pay each month is fixed. The only decision left is how to divide it between your debts.
People with two or three debts often split the extra evenly between them. It feels fair, and every balance drops a little each month. But the money is spread thin, so no single balance drops much and nothing is paid off for a long time. When you can't see progress, it is easy to give up on the plan.
First, pay the minimum on every debt, every month, without exception. A missed minimum brings late fees, extra interest and a mark on your credit report. Lesson 5.3 goes through what happens when you miss one.
Second, everything above the minimums goes to one target debt, the one debt that receives all the extra money until it is cleared. With all the extra on that one debt, its balance falls quickly while the others are paid at their minimums. Within months one debt is gone completely. For most people, that first paid-off balance is what keeps them on the plan.
There are two common ways to pick the target. The avalanche method (highest rate first) ranks your debts by interest rate and targets the most expensive one. It saves the most interest, because each extra dollar goes to the debt that costs most to leave alone.
The snowball method (smallest balance first) ranks your debts by balance and targets the smallest one. It costs more interest overall but clears a debt sooner, and some people need that early win to keep going.
Either method does far better than an even split or paying whatever is left over at the end of the month. Choose the method you will keep to.
Wei Ling has two debts (all her figures are example figures). Her credit card has S$3,000 on it at 26% a year, with a minimum of about S$90. Her personal loan has S$5,400 left, with a fixed instalment of S$300 at an effective rate of about 7% a year. Her card has both the higher rate and the smaller balance, so avalanche and snowball both pick the card as her target. Whenever one debt has both the highest rate and the smallest balance, the two methods agree on it.
Farhan's situation is different (his figures are invented examples too). He has two credit cards: S$1,200 at 25% a year and S$4,500 at 28% a year. Avalanche targets the S$4,500 card because its rate is higher. Snowball targets the S$1,200 card because its balance is smaller.
He works out both methods, paying S$600 a month in total toward his cards, with a minimum on each card of 3% of the balance or S$50. With avalanche, he is debt-free in month 11 and pays about S$790 in interest. With snowball, he is also debt-free in month 11 and pays about S$810 in interest, and the small card is paid off in month 3. Both totals are rounded, and the exact gap between them is about S$25. The gap is small because his two rates are close together. He chooses snowball, because a card cleared by month 3 is worth more to him than S$25.
When interest rates are close together, the interest gap between the two methods is small, as it is for Farhan. When rates are far apart, the gap is larger and avalanche is harder to argue against. If Farhan's rates had been far apart, the gap would have been bigger and his choice of snowball harder to justify.
Once your target is paid off, don't let its payment slip back into everyday spending. Add the whole amount you were paying on the cleared debt to the next target, on top of that debt's own minimum. This is called rolling the payment forward. Your total monthly repayment stays the same, but it is shared among fewer debts, so each debt is paid down faster than the one before. Keep rolling forward until every debt is cleared.
After Farhan clears the S$1,200 card in month 3, everything he was paying on it moves to the S$4,500 card, added to that card's minimum. He still pays S$600 a month in total.
Check fixed instalment loans before you move money onto them. As Lesson 5.1 pointed out, extra payments on these loans may save little and may bring an early repayment fee. Before you roll money onto one, ask the lender two things: whether extra payments will save you much, and whether there is an early repayment fee.
Once Wei Ling's card is paid off, her next target would be her personal loan, which is a fixed instalment loan. She will ask her bank both questions before moving her card payment onto it. Lesson 5.4 shows what she does after that conversation.
You now know enough to set an order and begin. The detailed comparison, full worked examples of both methods and how to set up a debt list properly are in module 6, "Pay off debt faster with a plan you will keep", of the course "Credit and debt: scores, cards, loans and BNPL". Lesson 6.4 of that course, "Run avalanche and snowball on a worked example", works through the two methods side by side.
To start, pull up your latest statements and list every debt you have, with three figures beside each one: its balance, its interest rate and its minimum payment.
List each debt with its balance, rate and minimum payment. Pick your order and mark the first debt you will target.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).