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Prioritising your debt repayments

It can be awkward to talk about our personal finances, which is why it can be equally difficult to ask for advice, especially when it comes to managing debt, what to pay back, and when.

3 minute read

If you’re struggling with where to start, here are some tips to help get you thinking, and on your way to prioritising your repayments.

Rank your debt

The first step in getting your head around just how much debt you actually have, is to write it down. List out all of your debts including the amount owing (balance), interest rates, minimum repayments, and what the term of the debt is. You can find the annual interest rates in your loan agreement or on your credit card bill. Now, order your debt by interest rate, starting with the debt you pay the most interest on.

High interest – highest priority

Paying off the highest interest debt first (the debts that charge the most interest per $1 borrowed) could save you the most in the long term. This usually includes things like credit cards, Buy Now Pay Later, hire purchase agreements, and personal loans. Clearing the debt that costs you the most is usually the fastest and cheapest way out of the red.

Low interest – lower priority

Take a look at which of your debts have the lowest annual interest rate. These debts may be a lower priority if they are costing you less comparably to any high interest debt you may have.

Large vs small debts

Some people find it easier to focus on paying the smallest debt first, regardless of the interest rate. While this may cost you more overall depending on the interest rates, ticking off one debt at a time while also making the minimum payments on any others, can help to build a sense of achievement and motivation. Decide what approach is going to suit you better and try to stick to the plan.

Make it manageable

If you have multiple loans to repay, it can feel overwhelming. You could consider applying for a debt consolidation loan, or a balance transfer to a low interest credit card, so you can group all your debt in one place and preferably at a lower interest rate. Remember to check the terms and conditions of any new loans or credit cards.

If you're a home owner and you have enough equity in your home, you may be able to consolidate your debts by applying for a home loan top up. This means your debt repayments would be made as part of your home loan. You may pay a lower interest rate on this in comparison to a personal loan. However, this option will usually spread the debt over a longer term, so whilst the rate may be lower, paying it over a longer term may cost more in the long run. You'd need to think carefully about your options and understand the total cost, if needed you could seek independent advice from a financial mentor.

Investing vs paying down debt

Investing may make sense if there's potential to earn more on your investment than you would pay in interest on your debt. But before you consider investing, it's worth remembering that investing carries risk. Even if the returns look great, they're not a sure thing. In contrast, the money saved by paying down debt is guaranteed.

It might be best to seek independent advice if you are considering investing vs. paying down debt.

It’s personal

However you plan to tackle your debt, it ultimately comes down to your own personal circumstances, what you’re comfortable with, and your appetite for risk.

If tackling your debt feels overwhelming there are organisations that could help. Find out about how BNZ's committed to manaakitanga, or caring for people and communities.

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Is debt consolidation the right choice for me?

Debt consolidation loans could help people who are struggling to keep on top of their finances, but here are five points to keep in mind.

What you can do if you’re experiencing financial hardship

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