Mad Hon · Debt to income

Choose the order you clear your debts in

Choose the order you clear your debts in. A step-by-step Mad Hon guide for your Debt to income score, written for olim.

1. The cheaper order: highest rate first.
Rank every balance by its effective annual rate, ribit shnatit metu'emet, which is the figure that folds fees into the interest and which Israeli lenders have to disclose. Pay the minimum on all of them, send every spare shekel to the one at the top, and when it closes move that whole payment onto the next. In an Israeli household the ranking usually starts with the current-account overdraft and a card on a revolving arrangement, then consumer loans, then a loan secured against your own keren hishtalmut or provident fund, with the mortgage at the bottom. This order pays the least interest, by arithmetic.
2. The order that gets finished: smallest balance first.
Same mechanics, different ranking: order by size of balance rather than by rate, and clear the smallest first. It costs a little more in total interest and it produces a closed account early, which is the thing that keeps people going. It is the better fit for anyone who has started clearing debt before and stopped partway. The interest it gives up is usually small next to the difference between finishing and not finishing.
3. Build the full list first, because you cannot order what you cannot see.
For each debt write down the balance, the effective annual rate and the minimum monthly payment. Three Israeli traps to sweep for. The overdraft is a debt even though the app shows it as one balance with your own money. Tashlumim, the instalment option offered at the till, commit the card for months after a purchase you have forgotten. And anything signed in your first year here is exactly what people forget. The Bank of Israel runs the central credit data register, and you are entitled to one free data-summary report a year from it, listing your obligations and how you have repaid them. Pull it before you rank anything.
4. Run both orders on your own numbers.
Take the list, add whatever you can put in above the minimums each month, and work out two things for each order: how many months until everything is clear, and the total interest paid along the way. Do it on your real figures rather than on an example. What the comparison is for is the size of the gap between the two orders, because that is what tells you whether the choice is worth agonising over.
5. Read the gap, then choose the one you will keep doing.
If the two totals come out close, the cheaper order is not buying you much and the more motivating one costs almost nothing. If the gap is wide, it is real money and worth weighing against how confident you are of holding a long run. Neither answer is right in general, and nobody can pick for you: what actually decides the outcome is that the payments keep leaving the account every month for as long as it takes. Write down which order you chose and why, so the choice survives a bad month.
6. Turn the choice into a standing order the same day.
A ranking that lives in a notebook does nothing. Set a hora'at keva, a standing order, above the minimum on whichever debt is first in your order, dated to the day the salary lands. Freeze the credit card in the issuer app while you clear it, watching for tashlumim already committed. Then check once a month that the balances are actually falling and move the payment on as each one closes.

Choose the order you clear your debts in. A step-by-step Mad Hon guide for your Debt to income score, written for olim.

1. The cheaper order: highest rate first.

Rank every balance by its effective annual rate, ribit shnatit metu'emet, which is the figure that folds fees into the interest and which Israeli lenders have to disclose. Pay the minimum on all of them, send every spare shekel to the one at the top, and when it closes move that whole payment onto the next. In an Israeli household the ranking usually starts with the current-account overdraft and a card on a revolving arrangement, then consumer loans, then a loan secured against your own keren hishtalmut or provident fund, with the mortgage at the bottom. This order pays the least interest, by arithmetic.

2. The order that gets finished: smallest balance first.

Same mechanics, different ranking: order by size of balance rather than by rate, and clear the smallest first. It costs a little more in total interest and it produces a closed account early, which is the thing that keeps people going. It is the better fit for anyone who has started clearing debt before and stopped partway. The interest it gives up is usually small next to the difference between finishing and not finishing.

3. Build the full list first, because you cannot order what you cannot see.

For each debt write down the balance, the effective annual rate and the minimum monthly payment. Three Israeli traps to sweep for. The overdraft is a debt even though the app shows it as one balance with your own money. Tashlumim, the instalment option offered at the till, commit the card for months after a purchase you have forgotten. And anything signed in your first year here is exactly what people forget. The Bank of Israel runs the central credit data register, and you are entitled to one free data-summary report a year from it, listing your obligations and how you have repaid them. Pull it before you rank anything.

4. Run both orders on your own numbers.

Take the list, add whatever you can put in above the minimums each month, and work out two things for each order: how many months until everything is clear, and the total interest paid along the way. Do it on your real figures rather than on an example. What the comparison is for is the size of the gap between the two orders, because that is what tells you whether the choice is worth agonising over.

5. Read the gap, then choose the one you will keep doing.

If the two totals come out close, the cheaper order is not buying you much and the more motivating one costs almost nothing. If the gap is wide, it is real money and worth weighing against how confident you are of holding a long run. Neither answer is right in general, and nobody can pick for you: what actually decides the outcome is that the payments keep leaving the account every month for as long as it takes. Write down which order you chose and why, so the choice survives a bad month.

6. Turn the choice into a standing order the same day.

A ranking that lives in a notebook does nothing. Set a hora'at keva, a standing order, above the minimum on whichever debt is first in your order, dated to the day the salary lands. Freeze the credit card in the issuer app while you clear it, watching for tashlumim already committed. Then check once a month that the balances are actually falling and move the payment on as each one closes.