Question:
I've been paying my home loan for nine years now (I'm not paying extra, just the minimum required amount). I recently realised how little of what I pay goes to reducing the bond amount. I've started being more frugal as I want to pay extra cash into the bond, but I have about R10 000 credit card debt.

Is it better to pay off the credit card first and then start paying extra cash into my bond?

Answer:
When considering a debt reduction strategy it is always best to try and pay off the most expensive form of debt first.

What do I mean by that? Well, pay off the debt with the highest interest rate first. The interest charged on a credit card is almost always much higher than on a bond, depending on one’s credit rating with the bank.

Paying off the credit card first in this instance is a better option for two reasons. Firstly, it is clearly the more expensive debt (not from a monthly payment perspective, but from a high interest rate perspective). Secondly, it is also a smaller capital amount to pay off. This means that it will be quicker to pay off than the bond and once it has been settled, those monthly contributions can then be applied to reduce the home loan.

Another option, if available, is to use your access bond's available amount to pay off the credit card right now. If one has an access bond facility (this allows a homeowner to access any capital amount paid off on their home) and the interest is lower on the bond than credit card, then this transfer of debt will save interest immediately. The credit card repayment amount can then be added to the bond repayments as well as any other extra amounts.

Being 'more frugal' is an excellent plan when it comes to debt reduction as well as other financial planning areas. Keep up the good work!

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

RSS

Digg

de.li.cious

facebook

MORE PERSONAL FINANCE

How to make more cash It's not easy to make extra money, but it can be done if you're creative. Here's how...

How to make more cash It's not easy to make extra money, but it can be done if you're creative. Here's how...

Can you go cashless? Follow this man as he uses plastic for every transaction he makes in the next three months...