How to get out of credit card debt
7 expert strategies for paying off your credit card debt for good, without giving up your daily coffee.
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As of 30 November 2020, there are more than 13.5 million credit cards in circulation in Australia with about $20.9 billion worth of national debt currently accruing interest. If you’re looking for ways to deal with credit card debt or avoid it altogether, we've got 7 proven strategies for you to explore.
1. Make regular repayments and pay more than the minimum
Create a realistic repayment schedule and stick to it. Making only the minimum repayments on your account will only keep you trapped in debt for a lot longer than is necessary and you’ll pay a lot more interest than you need to. A $2,000 debt at 20% interest with a 2% minimum payment will take you over forty years to repay and cost you over $5,000 in interest if you only ever pay the minimum amount. Add $50 each month and the debt is gone in three years with just $500 worth of interest paid. The smart thing to do is to create a budget for your monthly expenses and calculate exactly how much money you can afford to set aside for repayments each month. Pro tip: setting up an automatic debit to transfer that amount to your credit card account on a recurring date each month will help ensure that you stay on track.
2. Repay the debt with the highest interest rate first
This strategy targets interest reduction so that you’ll end up paying the least amount of interest over the long term. With high credit card interest rates, this could represent significant savings and the interest saved could be used to repay the rest of your debt sooner. Prioritise paying off the account with the highest interest rate first by allocating all available resources to it. Once you’ve paid that account off, close it to avoid further charges and move on to the account with the next highest interest rate.
3. Consider a credit card with a 0% balance transfer offer
0% balance transfer credit cards let you transfer your existing debt onto a new credit card with the benefit of paying no interest for an introductory period. This results in interest savings for that period, which can help you repay your debt faster. Having one account instead of a few can also mean that you save on account and administrative fees. However, it’s important to repay your balance transfer amount within the introductory period, since the interest rate will typically revert to the higher cash advance interest rate at the end of this period. In order to make sure you repay the full balance within the 0% interest period, divide your debt by the number of 0% months offered by your card and faithfully repay that amount each month. For example, if you have a credit card debt of $3,000 and a 0% balance transfer offer for 12 months, you’d need to allocate $250 each month to clearing the debt before the revert rate applies in the thirteenth month.
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4. Consolidate your debt with a personal loan
A personal loan could also prove to be an effective way to consolidate your debt at a lower interest rate. A personal loan can offer substantial savings on your interest payments compared to a credit card. Compared to a balance transfer credit card offer, a personal loan also offers a longer loan term than the balance transfer offer would. When considering a personal loan, factor in related costs such as application or establishment fees or monthly or yearly fees. Also, beware of further spending on your credit card once you’ve reduced your balance to zero with a personal loan.
5. Refinance your home loan
While this may sound drastic, refinancing your home loan can offer with it several perks. Refinancing generally gives you access to lower interest rates when you take on a new lender’s deal and you might be able to find a package with fewer fees and more features too. Carefully weigh up the pros and cons of this option though, because you’ll essentially be moving your credit card debt onto your home loan, which means stretching your debt over more years albeit at a lower interest rate.
6. Discuss your options with your bank
By having a chat with your bank, you may be able to amicably negotiate a more comfortable payment plan. You could be approved for an interest reduction or a short payment hiatus, which could help give you an edge on your repayments.
However, if you’re seriously struggling to make repayments, you may wish to consider a Debt Agreement or Personal Insolvency Agreement, which lets you negotiate a lower repayment amount and new terms with your creditors. Note that these are acts of bankruptcy that will also have their own repercussions on your credit file.
7. Look into financial counselling
Before pressing the big red button, you might like to call for help. Financial counselling does not have to be expensive and you can even receive free help for managing your debts. Obtaining professional financial and legal advice for your personal situation can sometimes be the first step towards debt freedom. You will be given personalised advice on how to consolidate your debts, manage creditors and protect your credit rating.
Paying off each card vs consolidating them: Which is the best way to get rid of credit card debt?
There isn't a single answer to this question because what is affordable and manageable for you will vary based on your circumstances and goals. To help you choose an option, here's an example of what to consider if you had two credit cards with $10,000 of debt between them .
- Paying off each credit card separately
If you wanted to keep both cards, then applying for yet another account could lead to more fees and a greater risk of debt in the future.
Also, if you apply for a balance transfer credit card, you would have to get approved for a credit limit of at least $10,000 to consolidate the debts. Some cards only allow you to transfer a percentage of your approved credit limit, which could leave you with debt on your current cards even if you're approved for a $10,000 limit.
- Consolidating your debts
This would make the repayments more straightforward because you'd only have one balance to manage. This also means you'd only have to make a single repayment each month, instead of juggling different due dates for the cards.
If you rolled these debts onto a credit card that offers 0% p.a. on balance transfers, it would also give you a way to pay off the balance without interest during the introductory period. However, you still need to think about whether the new card applies a one-off balance transfer fee or annual fee that could add to your upfront costs.
- The size of your debt matters, too
If you move $10,000 to a new balance transfer credit card with a 3% minimum payment, you'd have to pay at least $300 for the first month (and a similar, but decreasing, amount each month after that). If you only paid $300 per month, it would take you over 33 months to clear your balance.
So it's ideal to look for a 0% balance transfer offer that would let you pay off the entire balance during the introductory period. Or, check out other debt consolidation options.
How to avoid credit card debt
To prevent falling into debt, the following tips can help you keep your credit card under control:
- 0% purchase credit card. Get a credit card that offers 0% interest on purchases. This will allow you to make purchases and repay them without accruing any additional interest. This perk usually only lasts for a promotional period of up to 18 months, so be aware of the revert rate that applies after that time.
- Pay more than the minimum. Making only minimum repayments on your credit card balance typically means that you’re only paying 2.5% or $25 of your statement balance, whichever is greater. At that rate, it might take you years to repay even a modest balance. Learn how minimum repayments work and why you should be paying more.
- Stick to a budget. Create a budget for your expenses each month and schedule a payment plan to have your debts covered. Set up calendar reminders or, better yet, automatic debits to ensure that payments are made regularly.
- Move your statement due date. By making sure your statement due date is just after payday, you’ll definitely have the funds to repay your credit card bill on time.
- Identify why you first fell into debt. If you’ve cleared your balance and want to avoid debt in the future, you’ll need to identify why you lost control of your finances in the first place. Was it overspending, high interest rates or a combination of the two? Try working with a budget or get a card with a lower interest rate. If you’re an impulse shopper, leave your credit card at home so you’re not tempted to use it and make sure that you only use it for necessary purchases.
- Take measures to curb your spending. Creating a monthly budget should help curb expenditure, but you could also consider reducing your card’s credit limit as a stronger preventive for overspending.
- Stop using your credit cards. If your spending problem requires more than monthly budgeting and occasionally leaving your credit card at home, consider cancelling your cards altogether. prepaid credit cards and cash are surefire ways to avoid debt.
While credit cards can be a convenient way to pay, they make far better slaves than masters. If you have found yourself in credit card debt, follow the necessary steps and seek assistance as soon as possible to regain control of your finances. When considering if a credit card is still the best option for you, compare all your options and be wise about what you need for your own personal circumstances.
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