For most of us, debt is a fact of modern financial life. There’s nothing wrong with that – long-term debt like home loans or vehicle finance make home and car ownership possible; how else could we afford an asset that costs that much? And short-term debt like store cards, overdrafts, credit cards and personal loans help us cope with emergencies and smooth out any dips in our cash flow.

So, managed well, debt can be part of your strategy to make better money choices. It’s just another financial tool – but like most tools, it has a cost attached. Part of managing your debt well is making sure you keep interest and other debt fees as low as possible, so that your debt costs you less. We’ve identified some better choices that can help you cut the cost of your debt and save:

Keep your credit record spotless

The first factors banks consider when you apply for a loan, overdraft or credit card is your credit record and your credit score. The better your credit score, the more likely it is that your application will be approved, and the better your chances of being offered the product at a favourable interest rate.

Securing the lowest possible interest rate from the start is the first step towards your debt costing less, so maintaining your credit score at a level that results in preferential interest rates makes sense. That means you shouldn’t miss payments or pay any of your debts late, nor should you take on more debt than you can afford – there are several factors that can damage your credit score, so be aware of all of them.

It’s also a good idea to check your credit record every month, in case it contains any errors that impact your score negatively. You can then apply to the relevant credit bureau, with proof of payment, to have the error corrected. Through the Nedbank Money app, you can check your credit score any time you like, for free, on the Money app – and receive tips on how to improve it.

Avoid penalties

Keeping your credit score in peak condition is one reason to avoid missed, short or late payments. Another is the cost of these lapses themselves: a missed payment can attract penalty fees, which makes your debt cost more than it should. Luckily for Nedbank clients with credit card accounts, personal loans or overdrafts, late-payment penalty fees do not apply.

But you’d almost certainly pay a penalty on a missed store card payment, for example, so be aware of the risk. Debt payments should be part of the fixed costs in your monthly budget; it’s simplest to pay them by debit order as soon as your salary is deposited into your account, so that every payment is made on time.

If you use a personal loan to pay off other short-term debts immediately, you then have only one monthly payment to make

But even careful plans can be derailed by a sudden cash flow crisis. If you realise you’re short of the money you need to make all your upcoming debt repayments, contact your bank or creditor before the due date. If you can make a plan to restructure the debt into payments you can afford, you’ll avoid the negative impact of a missed payment on your credit record and be spared penalty fees.

Pay more than the minimum

Perhaps the most effective way to make debt cost less is to pay more than the minimum amount due every month. This reduces the capital amount you owe faster, which means you’re paying less interest on every instalment.

It works like this. Your monthly payments consist of 2 parts: capital and interest. The capital is the amount being subtracted from the original amount you owed, and the interest is that month’s portion of the interest due on the outstanding balance. When you pay back more than the minimum, the extra money goes to reducing the capital amount – so the interest due on the remaining balance the following month is lower than it would’ve been if you’d paid only the minimum.

Repeat this process every month, and you’ll not only pay off your debt faster, but you’ll also reduce the total amount of interest you pay.

Recognise potential problem debt early

For debt to be a tool and not your master, it needs to be available whenever you need it. Put another way: you shouldn’t max out your credit to the limit. On a product like a credit card, for example, you should try to keep your outstanding balance to no more than 30% of your credit limit. If your credit-use ratio is consistently higher, it could have a negative impact on your credit score, which again affects how much interest you pay when next you’re granted credit.

If you find you’ve taken on more debt than you’re comfortable with, and your monthly debt payments are taking up too much of your income, it’s best to take action sooner, rather than later. A consolidation loan may be a solution; if you use a personal loan to pay off other short-term debts immediately, you then have only one monthly payment to make.

When you clear one debt and switch to paying off another with a lower interest rate, the interest portion of each payment is also smaller

If the interest rate on your consolidation loan is lower than the average interest you were paying on the other debts, your monthly payment will be lower too. You can maximise that benefit by continuing to pay the same total you were paying before on all your different debts – so without paying any more every month, you’re still paying more than the minimum amount and therefore saving on interest.

Which debt do you target first?

If you don’t take a consolidation loan but you’re keen to reduce your short-term debt and you can pay more than the minimum every month, the only question is which debt to tackle first. You could spread the extra payment over all your debts evenly, but that’s not the fastest way to clear them. Quicker strategies can also save you more in interest. Let’s look at 2: the avalanche and the snowball.

Here’s an example of a list of debts you might need to clear, and average monthly instalments you might be paying on them. You can adjust it according to your own circumstances, but it will give you an idea of how the 2 strategies work:

• a store card with a R4,500 balance and interest rate of 20% (R225 per month);
• another store card with a R6,500 balance and interest rate of 20% (R325 per month);
• a credit card with a R15,000 balance and interest rate of 18% (R750 per month);
• a personal loan with R7,500 still owing and interest rate of 18% (R850 per month); and
• an overdraft of R5,000 and interest rate of 10% (R325 per month).

Your minimum monthly payments are R2,475 in total, and if you pay only that amount you will pay about R10,000 in interest over the full debt term. But if you can afford to pay just R525 more, bringing your monthly debt payments to a round R3,000, you can make a drastic difference.

The avalanche strategy saves you the most

With the avalanche method, you start paying extra into the debt that has the highest interest rate, while you maintain minimum payments on the others. Since both store cards charge 20% interest, pick the one with the higher balance of R6,500, because that’s the one you’re currently paying more interest on. If you pay R850 a month instead of R325, you’ll clear that account in 8 months instead of 20.

Then you can start paying an extra R850 a month into the R4,500 store card – although that balance will already be closer to R2,400 after 8 months of minimum payments. You’ll clear that balance in another 3 months, instead of 12. 

After that, you can target your credit card (with an extra R1,075 per month, because the second store card’s R225 instalment has been added to the R850), then your personal loan and finally your overdraft. By targeting the highest interest rates first, the avalanche method gives you the biggest saving, because your extra payment is reducing the capital balance that is costing the most in interest.

The process isn’t difficult – but it does take discipline and dedication

When you clear one debt and switch to paying off another with a lower interest rate, the interest portion of each payment is also smaller – which means your extra payments will reduce the capital amount even faster. The extra amount you can pay on an account every month also increases with each cancelled debt. The pace at which you clear your debts speeds up, like an avalanche.

The snowball method motivates you with early results

Although the avalanche method saves you the most in interest, it can take time before you see results, because you’re targeting the highest interest rate and the biggest debt at that rate first. If you need the motivation of quick wins to keep you dedicated to the path of paying extra to clear your debt faster, try the snowball strategy instead.

The snowball strategy simply targets the debt with the lowest amount owing. You’d first use the extra R525 a month to pay off your R4,500 store card, which would take you 7 months instead of 20. Then you’d target the R2,725 remaining in your overdraft, with an extra payment of R850 a month (R525 + R325), so that would be cleared in 3 months, not 13. Then you’d tackle your second store card, your personal loan, and finally, your overdraft – with the amount you can afford to pay increasing as each debt is cleared, like a snowball rolling downhill.

If you’ve decided you need to scale down your short-term debt and you have a bit extra to dedicate to that goal every month, the process isn’t difficult – but it does take discipline and dedication. A determined strategy like the snowball or avalanche can help by setting goals with measurable targets. Keep it simple and stick to the plan, and you can manage your debt in ways that enhance your life, instead of causing you stress.