If you have short-term debt you’re not alone. OECD data shows household debt levels have risen rapidly in many countries over the past two decades. But fear not! There are strategies for reducing your short-term debt. Finance expert Irit Harris shares her top two recommended approaches and, depending on your personality, one might work better than the other.

Australia’s household debt is one of the highest in the world, with the latest available OECD data showing the ratio of household debt to income has almost doubled between 1995 and 2020, going from 104% to 203%. Canada’s household debt is not far behind at 186% (2021). In the UK it’s 148%, New Zealand 122%, and the US 101%. This means that the average person in more than half of OECD member countries is spending all of their income every year, and in some countries up to double what they earned!

This debt can be broken down into a number of different categories including home loans, credit card debt, personal loan debt, and more.

Within these categories, some financial experts say there are two types of debt, ‘good debt’ and ‘bad debt’. Sorting debt in this way, credit card and personal loan debt (or short-term debt) fall into the ‘bad’ sort. It’s called ‘bad debt’ because it diminishes your wealth over time and is, essentially, a waste of money.

If you have short-term debt you’re not alone. Thankfully, there are two recommended approaches to getting rid of short-term debt and depending on your personality, one may work better than the other.

What motivates you?

If you’re motivated by small, frequent wins, then strategy one for eliminating short-term debt is ideal for you. The second strategy is better suited to you if you’re more motivated by data and getting the best financial outcome. Firstly, there are some small steps we can all take.

If your debts are spiraling out of control, begin to resolve your debt by:

1. Cutting up as many credit cards as possible.
2. Always meeting minimum repayments.
3. Using only ONE credit card for purchases (try to keep it for emergencies only).
4. Making a list of credit cards you have, how much you owe, and the interest rates.

If you’re motivated by frequent (albeit smaller) wins…

1. Order your credit card balances from smallest to largest.
2. Pay off the smallest balance first.
3. Celebrate (without using the credit card!).
4. Move on to the next smallest balance (and so on).

If you’re incredibly rational and want the biggest bang for your buck…

1. Order your credit card balances from highest to lowest interest rate.
2. Pay off the balance attracting the highest interest rate first.
3. Celebrate.
4. Move on to the balance attracting the next highest interest rate.

If you need more support, a financial coach could be what you’re looking for. Regardless of the option you choose, the important thing is to make a start and not allow your debt to continue getting out of hand. Your current and future self will thank you for it.

Written by Irit Harris. Irit is the founder of F-Empowered, a platform to financially empower employees to achieve their money goals through proven financial fitness programs. Aside from being an infinite learner (over 10 years in banking, MBA, Diploma of Finance, accreditation to give general advice on banking and insurance products), Irit is a mum to two beautiful kids, wife to the incredibly supportive Josh, and lover of travel, yoga and jogging. Follow F-Empowered on Facebook and Instagram.

Sources:
¹OECD