Fixing the Christmas Hangover

They can leave you with a headache, make you nauseous and stop you from thinking about anything else. Sometimes they're caused by excessive drinking and lack of hydration, other times they can be from spending too much money over Christmas and maxing out your short term credit facilities.

Something I always tell my clients to do when they've got a couple of debts going is to focus on one at a time and I usually suggest the credit cards be first cab out of the rank. Generally if a client has a personal loan, a mortgage and a credit card the credit card is going to be the smallest debt they have and also the one charging interest at the highest rate. If there is any cash available to make more than the minimum required payment that's where I'd direct it.

The usual scenario looks similar to this, mortgage, personal loan and a credit card or two, one with $2000 owing and the other $1000. The credit cards are being charged interest of 15% and the minimum repayment is around $41 and $21 a month. If you are able to increase the amount paid on the $1000 credit card to $200 a month you would be able to clear the debt and close the account in 6 months. You now have $200 extra a month to spend.

Once that first credit card is gone though the pace really picks up. You now have $200 spare (one credit card is gone) and that money goes to the next credit card with $5000 owing. You can clear that debt by putting the minimum repayment plus the spare $200 to it equalling $241 a month and close that credit card in 9 months. Now you have a spare $241 a month. Your personal loan is next. $10,000 loan paying 10% in interest and a total monthly repayment of $222. You increase the repayment to $463 a month and can have that closed in 2 years.

In 3 and a half years you have effectively closed 2 credit cards and a personal loan. The personal loan was meant to take 5 years to pay off alone. If you have a mortgage as well, I'm going to pretend it's a $500,000 mortgage and being charged interest at 4% a year (if you're paying more than 4% you should definitely call me). The repayments should be roughly $2397 a month. You add your spare $463 a month and you've just taken almost 8 years off the term of your mortgage and saved $107,000 in interest.