Top tips to clear your plastic debt
Went on a long overdue holiday, pampered yourself with a luxury hotel stay, and ended up over what you budgeted; Retail therapy session that went haywire because you couldn’t resist the urge? Or you had some unexpected financial circumstance changes, lost a job or endured an illness?
Don’t worry, we’ve all been there at some point in our lives. Everyone uses their own piece of plastic differently and we are not here to judge.
What we do know is that paying off a mounting credit card balance isn’t easy. So, to help you get you out of the vicious credit card debt cycle, we have compiled a few insider tips to get you on the Savvy train towards building your credit worthiness.
1. Examine your situation and set a goal
Firstly, put some time in this initial phase and make sure that you understand your own debt situation. How much you are owing and how much you will be able to pay off each month. Once that is worked out, set up a personal financial goal and stick to it! Having a visual board can help motivate you to aim higher and achieve being debt free sooner.
2. Try and pay more than the minimum balance
According to MoneySmart, “there are 7,765,000 credit card holders (18 years and older) in Australia. With around $32 billion owing, that’s an average debt of around $4,200 per card holder.”
If you carry a balance every month, you would know that the accrued interest charge will come back to bite you. A portion of your payment will go towards paying off the interest, rather than paying down your debt. If you make only the minimum repayment, your repayment might even be all interest, which won’t reduce your debt at all.
To avoid this, pay off as much as you can every month to reduce interest. If you keep paying the same amount as your current repayment, instead of paying lower repayments as the balance reduces, you will repay your debt much faster and save money.
Use tools like, MoneySmart’s credit card calculator which shows how long it will take to pay off your credit card if you make only the minimum repayments and how much time and money you’ll save by making higher repayments.
3. Pay from ‘high’ or from ‘low’ interest rate first?
Having multiple credit card balances to pay off each month can be very daunting, so a great way to pay down your plastic debt is to tackle one thing at a time and prioritise based on your own financial situation.
High – If you choose to pay off credit cards with higher interest rates first, you’ll be getting rid of the debt that will grow the fastest, so you’ll avoid the worst of the snowballing effect.
Low – Eliminate balances owing on low interest rate credit cards can make you feel a sense of achievement as it disappears quicker from your debt list.
4. Reduce and monitor spends
Finally, the last tip is to investigate ways to reduce spend. A big source of savings may be recurring expenses, such as the fortnightly gym membership that you rarely use, or the freshly barista-brewed coffee every morning because you don’t do instant. It is time for you to do a self-assessment to identify the unnecessary expenses that are keeping you in the debt cycle.
Be patient, clearing off your credit card debt will not happen overnight. It’ll probably take a lot of time and effort before you’re free of debt entirely, but once you are on the right track you will begin to see the results you are after – so hang in there!
If you are considering to trade in your high interest rate or steep annual fee credit cards for a better deal, you can visit our credit card comparison service to find a credit card that suit your needs.
Our Learning Hub features more credit card related articles, from all you need to know about credit cards, how to choose a credit card, negotiate for a better rate and signs that you should switch you credit card.