BUSTING OUT OF CREDIT CARD DEBT

Debt busting strategies (easier than you think)

Credit cards can be a useful tool, and if you pay your credit card off at the end of the month and are living within your means, you are probably doing fine. But, if you have carried credit card debt forward, we need to talk.  The worst thing about credit card debt is that you can probably barely remember what you bought with it!

Credit cards are designed to be used and accrue interest. Rates on credit cards have barely moved in years and most are around 19%. This is probably why credit card companies offer ‘perks’ such as Frequent Flyer points, special discounts, bottles of wine, and the feeling that you have joined an exclusive club. They may offer free travel insurance and colour-coded cards for prestige. At the end of the day, these perks are nothing more than smoke and mirrors designed to hide what they really are, enablers of debt.

I had $35,000 in credit card debt, many years ago…and as a single mother with a daughter at a good inner Melbourne school, I was trying hard to keep up appearances. I wanted her to have it all and if I’m honest, I wanted to look like I had it all. It took me a few years to pay off that debt and even longer to let go of the shame of being out of control with my spending.

You may have tried again and again to get on top of your debt. But that credit card bill just keeps creeping back up. Let’s start here by forgiving yourself. Give yourself a big pat on the back for using the resources you have available to you.

It’s time to step out of that shame bubble and move back into being in control.

Getting rid of card debt is not that hard if you are focused and patient. You can also get rid of the problem quickly. Please note here that I am not saying you need to get rid of all your cards.

Look at the bottom of the first page of your card statement and it will tell you how long it will take to pay your debt out by paying the minimum amount each month.

The minimum payment is around 2.5% of the outstanding balance — so if your card is maxed at $10,000 you will have a $250 minimum repayment. Try to increase these minimum repayments to the maximum you can reasonably afford so you can smash that debt in the shortest period possible.

Here are my top tips for getting in control of your debt!

Cut up your credit card

If you don’t have it, you cannot use it.

Refinance your credit card debt

Refinancing credit card debt into a personal loan or home loan may be a viable option if you have a strategy to pay off the debt as quickly as possible. The interest rate on a personal loan or as part of your home loan is likely to be a lot lower, but by extending the term of the loan you could be paying a lot more over time. For example, adding a $20,000 debt consolidation onto a 30-year loan at 4% a year will cost you $24,000 in interest. Tread carefully with this. You will have the option to pay it off sooner at a lower interest rate if you have a loan where you can make additional payments.

Transfer the balance of an existing credit card onto a new card via balance transfer offers

Moving your existing credit card debt to a new card that offers zero interest or small interest repayments for a small fee over a fixed period of time may be all you need to get rid of your debt. For example, if you owe $10,000 on a card and it will cost you $200 to balance transfer to a low-interest card with a fixed low-interest period (maybe 2% over 24 months) you will then need payments of $425 a month in order to pay it off. Make sure you read the fine print because in most cases the interest will be charged at a high rate if it’s not paid off in the specified time.

Look at Canstar and compare loans before committing to this credit card payment strategy.

Stop making purchases just for ‘points’

Paying down your credit card debt means clearing away the clutter surrounding ‘perks’ of a credit card and getting to the truth.

For example, if you accrue 1 point for every $1 you spend, with a view to buying a new appliance on points, take a minute to do the maths. You may need upwards of 5000 points to get that ‘free’ kettle. Who needs a $5,000 kettle?

Paying off multiple credit card debts

If you have multiple credit cards to pay down it can feel overwhelming. But a simple strategy can assist you to reduce your fees and interest (and help pay them off more quickly!). It’s called the Avalanche system.

Avalanche or Snowball your credit card debt

If you have multiple debts to your name, it can seem overwhelming to pay them down. Two methods exist with the aim to eliminate multiple debts: Avalanche and Snowball.

Avalanching your debt is a method of paying off loans or other debts by the highest interest rate first resulting in less interest paid overall. If you choose to snowball your debt, you will pay off the lowest balance first and work your way towards your bigger debts. Reducing the number of individual debts more quickly.

When choosing which option — Avalanche or Snowball —  is better for you, do a calculation of the total interest you will end up paying and try to choose the option which results in less interest being paid.

The examples below show how multiple debts can be paid off using the Avalanche and Snowball methods.

Example list of debts

CREDITOR            AMOUNT TO PAY OFF $ INTEREST RATE  CURRENT MONTHLY REPAYMENT $

Credit Card 1      $4,400                                                   13%        $50

Credit Card 2      $9,000                                                   13.5%    $110

Car loan 1            $3,200                                                   9.81%    $30

Car loan 2            $5,000                                                   12%        $55

Personal Loan    $4,900                                                   4%          $25

TOTAL DEBT        $26,500                 MONTHLY REPAYMENT $270

If you wanted to Avalanche these debts, the loan with the highest interest rate is the first to be paid off.

Avalanche method

CREDITOR IN ORDER

OF INTEREST CHARGED

(HIGHEST TO LOWEST)   ORIGINAL

BALANCE             INTEREST ACCRUED        MONTHS

TO PAY

OFF        MONTH PAID OFF

Credit Card 2      $9,000   $1,744.87             32          

Credit Card 1      $4,400   $1,798.64             44          

Car Loan 2           $5,000   $2,414.68            55          

Car Loan 1           $3,200   $1,467.30             62          

Personal Loan    $4,900   $1,011.94             70          

TOTAL INTEREST PAID    $8,437.43                           

If you wanted to Snowball these debts, the interest accrued would be higher.

Snowball method

CREDITOR IN ORDER

OF BALANCE 

(LOWEST TO HIGHEST)   ORIGINAL

BALANCE             INTEREST ACCRUED        MONTHS

TO PAY

OFF        MONTH PAID OFF

Credit Card 2      $3,200   $186.45                 14          

Credit Card 1      $4,400   $1,016.44             29          

Car Loan 2           $4,900   $570.81                 43          

Car Loan 1           $5,000   $2,417.89             56          

Personal Loan    $9,000   $6,392.36             75          

TOTAL INTEREST PAID    $10,583.95                         

It is also so important to make sure your income is reflected in what you set your repayments at. The last thing you want to do is stretch yourself too thin and then not be able to stick with your plan. Make sure your plan is accurate and realistic for you.

Each time you pay off a credit card by $1000, reduce the spending limit on the card.

Don’t have a credit card ‘just for emergencies.

An emergency cash fund is a better option to avoid you incurring additional debt at short notice.

Phoebe x