A number of people are increasingly opting for credit cards and personal loans in the UAE. This, in turn, leads to a mounting debt with different interest rates. So how do you prioritise? Which credit card payment do you make first? There are two methods that can help you tackle your debt in a simplified and systematic way. Let’s take a look at these two unique approaches to debt settlement.
Debt Stacking
This method requires you to arrange your debts in a descending order on the basis of interest rates, irrespective of the amounts.
For instance:
| Card | Amount | Interest Rate (Per Month) |
|---|---|---|
| Platinum Visa Card | AED 2,000 | 3.50% |
| Titanium Master Card | AED 4,000 | 3.09% |
| Gold Visa Card | AED 1,000 | 2.99% |
| Classic Master Card | AED 5,000 | 2.83% |
The goal is to pay the debt with the highest interest rate first and move on to the next one on the list.
Of course, you need to continue making the minimum payments on all amounts to avoid any late payment charges. However, you then use your savings to pay off the first amount on the list i.e. AED 2,000 for the Platinum Visa Card. Once you’ve struck that out, move on to pay the next amount with the second highest interest rate i.e. AED 4,000 for the Titanium Master Card. Paying off larger amounts might take time but it is advisable to stick to the sequence and then move on to amounts with lower interest payments.
Advantages
– You end up paying low interest.
Disadvantages
– You may take a long time to pay off a higher debt amount on the list. It can be demotivating to struggle every month to make the payment and not see any major improvement in your debt condition.
Debt Snowball
This method requires you to arrange your debts in an ascending order on the basis of the debt amounts irrespective of the interest rates. For instance:
| Card | Amount | Interest Rate (Per Month) |
|---|---|---|
| Gold Visa Card | AED 1,000 | 2.99% |
| Platinum Visa Card | AED 2,000 | 3.50% |
| Titanium Master Card | AED 4,000 | 3.09% |
| Classic Master Card | AED 5,000 | 2.83% |
The goal over here is to make the smallest payment first, so there isn’t much of a struggle at the initial stage of the repayment schedule. This can be motivating as it gives you a sense of achievement when you are able to pay off one debt and move on to the next with ease.
Again, remember that you have to keep paying the minimum amounts on all debts to avoid any late payment charges. Then use some of your extra money to pay off the smallest amount on the list irrespective of the interest rate i.e. AED 1,000 for the Gold Visa Card. Once you’ve tackled that, move on to pay the next smallest amount on the list.
Advantages
– This is a motivating method as it gives you an immediate feeling of achievement
Disadvantages
– This method does not consider your interest while making the repayments. You might begin with making the smallest payment having the lowest interest rate leaving higher amounts with higher interest rates for later. This will lead to higher interest payments and hence is not as cost effective as debt stacking.
You can select one of the above methods and start making your debt repayments. Remember to stick to the selected method else you may end up paying more interest on your debt.
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