Managing Bad Debt

Debt is an all-too-common challenge, affecting individuals, households, businesses, and even governments. But if you’re feeling overwhelmed, take heart—there are ways to regain control. Here are some practical strategies to help you tackle debt and move toward financial freedom.

Understanding How You Got Here

The first step to getting out of debt is understanding how you got into it in the first place. If your debt has been creeping up due to ongoing overspending, it’s time to plug the leak. That means identifying where your money is slipping away and making adjustments. Start by tracking your expenses for a month—you might be surprised at how small, frequent purchases add up. Look for areas where you can cut back, such as dining out, subscription services, or impulse buys. Setting a budget and sticking to it will help ensure your spending stays within your means. The golden rule? Spend less than you earn. Even small changes, like switching to home-cooked meals or reviewing your utility plans for better rates, can free up extra money to put toward your debt.

Stop Taking on New Debt

One of the simplest but most effective ways to get ahead is to avoid adding to your existing debt. This means putting the credit cards away and resisting the temptation of buy-now-pay-later offers.

Sell What You Don’t Need

Take a look around your home—there’s a good chance you own things you no longer use or need. Selling unused items can provide a cash boost to pay off debt faster. That spare TV, the bike gathering dust in the garage, or even a second car could all help reduce your financial burden. Beyond the obvious, consider smaller items too—unworn jewellery, kitchen gadgets you never use, or collectibles gathering dust. Selling these on platforms like TradeMe or Facebook Marketplace can quickly add up, turning clutter into extra cash for debt repayment.

Reduce Credit Card Interest

If you have credit card debt, explore balance transfer offers. Some banks offer lower interest rates when you transfer your balance to a new card. This can save you hundreds in interest, allowing you to pay off debt faster. Just be sure to check the fine print for any fees or conditions.

Prioritise Your Debt

Not all debt is created equal. Focus on paying off high-interest debt first—credit cards, personal loans, and anything with steep fees. Lower-interest debt, such as a mortgage, should come later. Tackling the most expensive debt first saves you the most money in the long run.

To make the best progress, prioritise your repayments using one of these methods:

• The Snowball Method: Start by paying off the smallest debt first while making minimum payments on the rest. Once the smallest debt is cleared, move to the next one. This method builds momentum and motivation.
• The Avalanche Method: Focus on paying off the debt with the highest interest rate first. This method saves you the most money in the long run.

For example, if you have a credit card balance of $3,000 at 20% interest and a personal loan of $5,000 at 7% interest, the avalanche method would focus on eliminating the credit card first because it costs more in interest.

Cut Unnecessary Expenses

Look for ways to free up extra cash. Cutting back on takeaways, unused subscriptions, or costly habits like daily barista-made coffee can make a big difference. Consider meal planning to reduce grocery bills, swapping gym memberships for free outdoor workouts, or choosing homemade gifts instead of store-bought ones. Even small changes—like bringing lunch from home, carpooling to save fuel, or using cashback apps—can add up significantly over time.

Improve Your Credit Score

A better credit score can lead to lower interest rates, making borrowing cheaper if you ever need to do it again. Pay your bills on time, reduce outstanding debt, and check your credit report regularly for any errors.

Consider Refinancing or Debt Consolidation

If you have a mortgage, refinancing to a lower interest rate could save you a significant amount. If you have multiple debts, consolidating them into a lower-interest loan (for example your mortgage) may make repayments more manageable. However, always check fees don’t outweigh the benefits.

Increase Your Income

If your current income isn’t enough to make progress on your debt, there are several ways to boost your earnings. Taking on extra work, such as a part-time job, freelancing, or a side hustle, can provide the extra cash you need to pay down debt faster. If you haven’t had a pay rise in a while, it might be worth asking for one. A small salary increase could make a noticeable difference in your financial situation. Another option is selling items you’ve crafter yourself. If you have a spare room, renting it out can also provide additional income. Finally, offering services such as babysitting, dog walking, tutoring, or handyman work can all bring in extra cash to help you make progress on your debt.

Use Windfalls Wisely
Bonuses, tax refunds, or unexpected cash gifts can be tempting to spend. However, applying these funds to your debt can significantly speed up your journey to financial freedom.
For example: Instead of splurging a $1,000 work bonus, consider using it to pay off a credit card balance.

Automate Your Payments
Setting up automatic payments is a simple way to stay on top of your bills and avoid late fees. 
For example: A couple struggling with budgeting can set up automatic transfers to their debt repayment account every payday, ensuring they never miss a payment.

Stay Focused and Be Patient

Becoming debt-free won’t happen overnight, but small, consistent efforts add up. Set realistic goals, track your progress, and celebrate milestones along the way. The more proactive you are, the sooner you’ll be in control of your finances and looking ahead to a more secure future.