50k-in-debt

The best way to pay down $50,000 in debt

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Debt can creep up on you, so what do you do when it hits $50,000?

Debt always starts out small, and while for many people it doesn't grow into a problem, for others it does. This page discusses expert-approved strategies at paying down a large sum of debt, Specifically, $50,000.

The $50,000 problem

Joe and Lillian are in an enviable position as homeowners. They purchased a house 12 years ago for $287,000 and currently have a variable rate loan with ANZ. They have $130,000 in equity and $157,000 in principal remaining. Their net household income is $64,168.

While they have assets, they also have considerable debts. At the moment they have a $20,000 debt on their HSBC Platinum credit card and a $30,000 car loan debt with Bankwest.

Noel Whittaker

Finance expert, Sydney Morning Herald

Smallest to largest

If the term is fairly short – under five years – there is really no point in chasing a cheaper rate. This is why I recommend the strategy of paying off the smallest loan first if you've got several personal loans. A key factor is to improve your money management habits if you are in trouble because of that. Otherwise, you'll be back where you started, even if you do manage to pay off the existing debts.

I am aware of the strategy of consolidating all your debts into your home loan to get a cheaper rate and this will work if you substantially increase the repayments on that loan. Otherwise, all you'll be doing is stretching out your current personal loans to 30 years! If you have investment loans as well as non-deductible housing loans – most people in trouble don't – you could move the investment loans to interest only which should reduce the repayments on them and then use the money so saved to speed up the payments on your non-deductible loans.

Robert Dawson

Financial Advisor, Insight Investment & Retirement Strategies

The main problem and two solutions

Joe & Lillian’s core problem is that their net income is only $5,333 per month but their combined debt expenses (based on current interest rates and probable repayment schedules) are now $2,860, 53% of the net income per month.

This is comprised of the following:

  • Credit card debt minimum repayment of $600 per month ($333 interest at 20% p.a.)
  • Personal loan (typically over five years) now in year four with $775 in repayments per month ($275 interest at 11%)
  • Mortgage of $1485 month (including interest of 6.5% $850 per month)

This only leaves them $570 per week to live on. There are a couple of options.

Option 1: Debt consolidation into your mortgage

The simplest solution is to approach their bank and consolidate their credit card and personal loan into the mortgage, using the equity in their home, but maintain a high repayment schedule. Their new debt will be $207,000 and on the old remaining 13-year time frame the repayments will be $1,957, up from $1,485 per month.

But the total interest payments are now spread over another 13 years which is greater than the original car and car loans interest payments were over only five. So they still need to set a target of say 40-45% of income to service the debt.

At 45% of net income, the repayments should be $2,400 per month and the whole debt now will be eliminated in only nine years and nine months instead of 13 years. They will now also have an extra $100 per week to live on. If they occasionally wander off the repayments they have set themselves, then they will still reduce their total interest payments from $100,000 over 13 years to say $73,000 - $75,000 over the period they do pay back the loans.

This amount is close to the total interest that the home loan itself was going to be over the 13-year period. They have effectively eliminated the $50,000 in debt virtually interest-free, so to speak.

Option 2: The 18-month kill zone

An additional little twist to add value – if they really wish to kill their debt and can manage the existing repayments for just another 18 months is as follows:

1. Apply for another credit card that has a special 0% interest-free period to rollover the existing $20,000 card debt and repay that at the same rate as the minimum $600 per month required. All of this will go to reduce the debt, not half of it.

2. Consolidate the car loan debt with the mortgage but maintain the same repayment rate added to the existing home repayment. Then with your credit card the new arrangement will, over six months, eliminate $3,600 of debt and if repeated on another credit card, six months later will reduce another $3,600. At the end of a third six-month period they will have eliminated $10,800. There is a limit as to how long you can keep doing this and you need to get rid of the old cards as you acquire a new one with an interest-free period.

If they then add the remaining $9,200 to their mortgage in 18 months, the total amount outstanding will then be approx. $174,000 at that point in time. Then set the overall repayments at the 45% of income ($2400) the total debt will be eliminated in the remaining eight years and the remaining interest paid will be approximately only $48,000 (at 6.5%). However, great discipline is required to achieve this.

*Important: This is general advice only on credit card and debt management

Visit Robert Dawson's website Insight Investment & Retirement Strategies: iirs.com.au

We're a society that's driven by wants, not needs. It's a want society. You see all the advertising and promotion; it's all about what you want, not what you need. You don't really need a shirt with a $50 logo on it; you're quite happy with a $25 shirt. A lot of these ads tell you that you should buy these things because you're worth it, not if you can afford it. That's how people get into debt.

I think the best way to manage debt is to write down all the expenses you have in a typical week, make allowances for some of the quarterly expenses that you have and try to work out what things you don't really need to do. It might mean that one weekend a month, you need to have a poverty weekend where you don't go out and spend. That money that you save on that weekend is what you use to pay off your debt.

If you find that at the end of the month you're struggling to pay whatever bills that you having, if you find that your credit card never seems to go backwards because you're not managing it properly, then they're signs that you're struggling. What you should be doing is being far more disciplined.

For any lender or provider to report someone for bad credit, there's a process that they have to go through. If you've just missed one payment on a telephone bill or a credit card payment, that is not cause for being reported for bad credit. They will obviously remind you for numerous times over numerous months and at the end of 3 or 6 months and you haven't responded, they can then go to the credit file and report you as nonpayment. Some companies operate on a 180-day payment process and if it's not cleared up within that time, they feel it's justified to do something. Always contact the people that are tracing you and always make an effort to pay.

All loan applications can be affected by bad credit. If it's a personal loan or credit card application, that's unsecured debt that you're applying for. If you have other loan defaults from previous credit cards or mobile telephone bills, then they will count very heavily towards that application. With home loans, they may still affect your application, but they will want a higher deposit for the home loan to compensate for the risk. That's secured debt; that's a different matter.

That's very important. If they've already got a default and they don't have good credit, first thing they need to do is to access their credit reference and see what the credit authorities are saying about them. They are allowed to do that and that is required under law. If there's anything that's wrong, they should challenge it and give a detailed explanation as to why that piece of information is wrong. If there are any payments that should be made that are outstanding, or there's debt that they have actually paid off, even if it was late, then they should bring that to
their attention, as well. Don't leave debt unpaid.

First of all, it depends on what kind of credit card they're using. I'd recommend that they move to a lower rate card. Secondly, they need to do some budgeting. Thirdly, we would need to direct debit payments from their bank account to the credit card, preferably the day after they're paid, then they have to live on what's remainder. They're part of the initial steps. We may also then suggest a few things that they need to tailor their life around, like having a weekend with no spending once a month in order to get rid of the debt.

Yes. I think people should be very conscious about what product they've got and what other options there are in the market. If they start off with a low interest rate credit card rather than a high interest rate credit card, then the chances are that they won't need to reconsider what product they're using. If they've started off on a higher interest rate credit card, they need to be conscious of the fact of what it's costing them in the long-term.

Lesson learnt: Getting into debt is easier than getting out

Where to next? Explore some of our other guides about debt and financial management.

Want to put some of our expert's strategies into action?

Rates last updated October 23rd, 2017
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NAB Premium Card - Exclusive Offer
0% p.a. for 24 months
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$90 p.a.
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Virgin Australia Velocity Flyer Card - Balance Transfer Offer
0% p.a. for 18 months
20.74% p.a.
$129 p.a.
Earn 3 bonus Velocity Points per $1 for the first 3 months, a first year annual fee refund and a yearly $129 Virgin Australia Gift Voucher.
St.George Vertigo Platinum
0% p.a. for 24 months with 2% balance transfer fee
12.74% p.a.
$99 p.a.
Offers complimentary travel insurance, complimentary purchase insurance and access to a 24/7 personal concierge service.
Citi Platinum Credit Card - 100k Bonus Points
0% p.a. for 15 months with 1% balance transfer fee
20.99% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Earn 100,000 reward Points, take advantage of a long-term balance transfer offer and receive complimentary travel insurance.
Westpac Low Rate Card - Online Only Balance Transfer Offer
0% p.a. for 24 months with 2% balance transfer fee
13.49% p.a.
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Take advantage of 0% p.a. for 24 months on balance transfers with a 2% balance transfer fee. Plus, use of the Westpac mobile banking app.
ANZ Platinum Credit Card - Exclusive Offer
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Earn 1 Reward Point per $1 of eligible spend and receive complimentary travel and purchase protection insurances.
Bank of Melbourne Vertigo Platinum
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Get a range of complimentary insurance covers, access to a 24/7 concierge and up to 55 days interest-free on purchases.
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Receive complimentary purchase protection insurance, special offers from Visa Entertainment and up to 44 days interest-free on purchases.
HSBC Low Rate Credit Card
0% p.a. for 15 months with 2% balance transfer fee
13.25% p.a.
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Receive up to 55 days interest-free on purchases. Also enjoy exclusive offers with the home&Away Privilege Program.
Virgin Money Low Rate Credit Card
0% p.a. for 14 months
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Receive a discounted annual fee, $100 cashback when you meet the spend requirement and up to 44 days interest-free on purchases.
BankSA Vertigo Visa
0% p.a. for 18 months with 2% balance transfer fee
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$55 p.a.
Get up to 55 days interest-free on purchases and be protected by a 24/7 fraud monitoring service.
NAB Low Rate Platinum Card
0% p.a. for 16 months with 2% balance transfer fee
13.99% p.a.
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Enjoy the protection of 7 complimentary insurances including overseas travel and purchase protection insurance.
Citi Rewards Platinum Credit Card
0% p.a. for 24 months with 1.5% balance transfer fee
20.99% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Offers a long-term balance transfer. Earn extra points on eligible international spend, plus complimentary travel insurance.
Woolworths Everyday Platinum Credit Card
0% p.a. for 14 months
19.99% p.a.
$0 p.a. annual fee for the first year ($49 p.a. thereafter)
Receive a $50 eGift Card when you apply by 31 January 2018 and make an eligible purchase by 28 February 2018.
American Express Essential Credit Card
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Receive a $50 credit when you apply online, are approved and spend $750 on your new card within the first 3 months of card membership.
American Express Explorer Credit Card
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20.74% p.a.
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Receive a $400 Travel Credit every year and up to two entries per year to the American Express Lounge at Sydney International Airport.
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0% p.a. for 13 months (reverts to 12.99% p.a.)
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Receive up to 55 days interest-free on purchases and free worldwide emergency card replacement.
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$64 p.a. annual fee for the first year ($129 p.a. thereafter)
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Rates last updated October 23rd, 2017
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Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Monthly Repayment Product Description
Citi Personal Loan Plus
From 9.99% (variable)
10.95%
$5,000
3 to 5 years
$10
$199
Borrow up to $75,000 to use for a range of purposes. Competitive rate of 9.99% p.a. available to all approved applicants.
Pepper Money Unsecured Fixed Rate Personal Loan
From 9.99% (fixed)
9.99%
$5,000
1 to 7 years
$0
$0
Apply for up to $50,000 and receive conditional approval within minutes.
SocietyOne Unsecured Personal Loan
From 7.5% (fixed)
9.51%
$5,000
2 to 5 years
$0
3% (of loan amount)
Based on your risk profile, you will receive a tailored rate between 7.5% and 20.14% with a SocietyOne personal loan.
NOW FINANCE Personal Loans
From 8.95% (fixed)
10.42%
$4,000
1.5 to 7 years
$13
$395 (Based on $10,000)
Get rewarded with a low interest rate for your good credit history. Rates from 8.95% p.a. to 16.95% p.a. depending on your credit score.
Latitude Personal Loan (Secured)
From 12.99% (fixed)
14.2%
$3,000
2 to 7 years
$13
$250 (Loans under $4000 - $140)
Can be used for whatever purpose: renovating, buying a car, booking a holiday. Funds can be in your account in as little as 24 hours.
DirectMoney Unsecured Personal Loan
From 8.5% (fixed)
9.36%
$5,000
3 to 5 years
$0
$595
This unsecured loan features tiers of interest rates from 8.5% p.a. to 19.95% p.a. based on your credit history.
RateSetter Personal Loan
From 8.66% (fixed)
9.17%
$2,001
0.5 to 5 years
$0
$0 (Upfront fee $250 for loan terms of 2 years and above)
RateSetter offers personalised interest rates ranging from 3.7% p.a. to 9.6%.p.a. determined by your risk profile.
Bank Australia Lifestyle Personal Loan
From 11.89% (variable)
12.94%
$1,000
1 to 10 years
$0
$150
A competitive variable rate loan that gives you ten years to repay.
Swoosh Finance
From 48% (variable)
66.04%
$2,100
1 to 2 years
$400
A secured loan you can apply for in 10 minutes that gives you up to 12 months to repay. Note: Max loan amount $4,600. Fees and charges included in repayment.

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Rates last updated October 23rd, 2017
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Loan purpose
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Loan type
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.64%
3.66%
$0
$0 p.a.
80%
A basic home loan with a competitive rate and low fees.
3.65%
3.66%
$0
$0 p.a.
90%
Enjoy a low variable rate with no ongoing fees and borrow up to 90% of the value of the property.
3.64%
3.66%
$0
$0 p.a.
80%
A home loan with a competitive variable rate, limited fees and plenty of flexibility.
3.49%
4.47%
$0
$375 p.a.
90%
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.88%
4.89%
$0
$395 p.a.
95%
A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.
3.65%
4.84%
$0
$395 p.a.
90%
A 2 years fixed platinum package that has $0 application and a loan redraw facility.
3.74%
3.74%
$0
$0 p.a.
80%
Combine a low variable interest rate and free redraw with no application or ongoing fees.
3.69%
3.72%
$0
$0 p.a.
80%
A low rate home loan with no ongoing fees.
3.74%
3.74%
$0
$0 p.a.
80%
A basic owner-occupier home loan with a low variable rate that requires a 20% deposit.
3.72%
3.74%
$0
$0 p.a.
80%
Take advantage of a 100% offset account along with no annual or application fees.
3.73%
3.73%
$0
$0 p.a.
90%
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.86%
3.87%
$0
$0 p.a.
80%
Pay no ongoing fees on a competitive variable rate home loan.
3.99%
4.02%
$600
$0 p.a.
90%
Take advantage of a 0.60% discount on your rate, a 100% offset account and no ongoing fees.
3.97%
4.02%
$445
$0 p.a.
90%
Get a competitive rate without features you may not use.
3.84%
3.84%
$0
$0 p.a.
110%
Requires a family member to act as guarantor. Discounted rate available with family pledge loans. Family pledge loans require no LMI and no deposit. NSW, Qld and ACT only.
3.64%
3.64%
$0
$0 p.a.
70%
A basic low-rate home loan that still offers some useful features.
3.77%
3.81%
$200
$0 p.a.
95%
A basic home loan with a low interest rate and a redraw facility available.
3.65%
4.10%
$500
$0 p.a.
95%
Get a discounted fixed interest rate for the first 12 months while you settle into your new loan.
3.74%
3.75%
$0
$0 p.a.
80%
A special variable rate home loan with no application or ongoing fees.
3.74%
4.15%
$0
$395 p.a.
80%
Enjoy a discount of a competitive interest rate and 100% offset account.
3.97%
3.99%
$0
$0 p.a.
90%
A great interest rate home loan offer with unlimited redraw and unlimited extra payments.
3.96%
3.98%
$0
$0 p.a.
90%
Take advantage of a redraw facility, competitive variable rate and no application or settlement fees for a limited time.
3.74%
3.74%
$0
$0 p.a.
90%
A competitive variable rate with a redraw facility. NSW, QLD and ACT residents only.
3.97%
3.97%
$0
$0 p.a.
80%
A competitive variable rate home loan with no ongoing fees.
3.84%
4.83%
$0
$0 p.a.
95%
Get a competitive 2-year fixed rate with no application or ongoing fees.
3.72%
4.19%
$0
$0 p.a.
80%
Enjoy a variable 3 year introductory rate with the Bankwest Equaliser Home Loan.
3.64%
4.03%
$0
$395 p.a.
95%
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
4.09%
4.12%
$0
$0 p.a.
80%
Access the equity in your home with a competitive interest-only rate and no application fee.
3.99%
4.02%
$395
$0 p.a.
80%
A flexible low-rate variable home loan that lets you combine your loan with other financial products.
3.69%
4.45%
$0
$375 p.a.
90%
Discount off an already competitive 2 year fixed rate for loans over $150k. NSW,QLD and ACT residents only.
3.83%
3.83%
$0
$0 p.a.
70%
A special low variable rate for owner occupiers with 100% offset account and no application or ongoing fees.
3.89%
3.91%
$0
$0 p.a.
80%
Package your owner-occupied loan with your investment loan and enjoy low rates for both.
3.79%
3.92%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with flexible features. You can earn 30,000 Velocity Points for every $100k you borrow (for a limited time, subject to eligibility requirements).
4.09%
4.11%
$0
$0 p.a.
80%
A low variable rate loan with no application or ongoing fees.
4.19%
4.19%
$0
$0 p.a.
90%
100% offset account, unrestricted additional repayments and no monthly account keeping fees
3.69%
4.00%
$0
$350 p.a.
95%
Fix your rate for 3 years and borrow up to 95% LVR.
3.99%
4.77%
$0
$0 p.a.
95%
A competitive 3 year fixed rate with a redraw facility and split loan options, plus no application fee.
3.94%
4.88%
$0
$0 p.a.
95%
Enjoy a low interest rate and borrow up to 95% (with LMI) of your property's value.
4.33%
4.33%
$363
$0 p.a.
70%
A variable home loan with $0 annual or monthly fees.
3.80%
3.81%
$0
$0 p.a.
95%
A no frills loan with a competitive rate and a maximum LVR of 95%.
4.03%
4.07%
$0
$0 p.a.
95%
Enjoy a basic home loan with a high LVR and no application or ongoing fees.
3.88%
4.47%
$0
$0 p.a.
95%
This competitive introductory rate is a limited time offer for new owner-occupiers
3.68%
3.69%
$600
$0 p.a.
90%
Get a low variable rate along with some important basic features.
3.79%
3.79%
$0
$0 p.a.
80%
Minimum loan amount for this basic home loan is $750001.
4.39%
5.42%
$300
$10 monthly ($120 p.a.)
95%
Lock in a fixed interest rate term for repayment certainty.
3.69%
4.03%
$0
$299 p.a.
80%
Enjoy a low variable rate with no application fee.
3.99%
4.99%
$0
$395 p.a.
95%
A package home loan with fee free extra repayments available during the fixed term.
3.85%
4.95%
$0
$395 p.a.
95%
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cashback available for refinancers. Conditions apply.
3.88%
4.88%
$0
$395 p.a.
95%
Lock in a discounted fixed rate with a low service fee.

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4 Responses

  1. Default Gravatar
    MarkNovember 10, 2013

    Hi there,
    My wife and I have saved a $20,000 deposit for our first home,and we have a car loan which owes $.45,000.Should we focus on getting the car loan down before applying for a mortgage or do lenders take that into account. Just worried that the bank will knock us back.

    • Staff
      ShirleyNovember 11, 2013Staff

      Hi Mark,

      Thanks for your comment.

      It is likely that your car loan affects the amount that you can borrow to purchase a property, but it shouldn’t really affect your chances of getting a home loan, given that both of you have a good credit history plus you already have a deposit.

      Our borrowing power calculator can give you a good indication of how much you can borrow.

      Hope this helps,
      Shirley

  2. Default Gravatar
    BenJuly 24, 2013

    How can I manage to save on interest and bring down my debt fast, I earn 62k gross and no kids, pay 150 per week in rent and 150 on groceries etc.
    1# personal loan of 50k down to $26,400.12.9%
    2# flexi loan is $12,800 13.25%
    3# westpac credit card $13,897 12.9%
    4# anz credit card $8,867 16.8%

    • Staff
      JacobJuly 24, 2013Staff

      Hi Ben. It’s should go without saying that you should focus on the balances which are attracting the highest rates of interest first. Due to the spread of the products you hold, you will be unable to consolidate all the balances onto a credit card through a balance transfer as you can only consolidate other credit cards, store cards and charges cards (and in some cases personal loans and lines of credit) to a credit card.

      So you have the option of consolidating all the balances under a debt consolidation loan.
      Another option is to continue to pay down the flexi loan and consolidate the ANZ Credit Card, Westpac Credit Card and personal loan to a Citibank account or Virgin account. Citibank and Virgin are two institutions that allow you to transfer the balance of a personal loan or a line of credit to one of their credit accounts (credit cards and credit accounts). For example, the Citibank Ready Credit Account currently allows you to consolidate multiple balances under a promotional balance transfer rate or it allows you to write a cheque to self charged at the balance transfer promotional rate of interest. You can spend this cheque as you choose.

      The biggest issue I have found with repaying credit cards / loans is finding the sweet spot with how much to pay off the card(s) each month. If you pay too much, you may find that you have to redraw on these funds towards the end of the month. Careful budgeting and discipline is key.

      I hope this helps.

      Jacob.

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