How to pay off your credit card debt in 7 steps
Credit cards are not the complete villains they are often painted out to be. After all, they can be great financial tools that come with bonuses, rewards points, cash backs, and credit building opportunities. But when a huge pile of credit card debt rears its ugly head, it can leave you struggling with unforgiving late fees and high interest rates.
It happens to the best of us, and there are many Aussies in the same boat. The brilliant news is, there are practical steps you can take to nuke that credit card debt and give yourself a breather. Check out our seven-point guide:
One: Write it down and add it up
The instruction to budget has probably been shoved down your throat by every personal finance expert out there. But there’s a reason why it can’t be said enough. Creating a budget forces you to get organised. You have to put everything in black and white: How much you owe, the amount you spend, and what you need to do to change those numbers for the better.
Don’t be vague with it. Create a detailed outline with realistic goals and specific actions. If your goal is to pay down a certain amount of credit card debt within a particular period, you can decide to do so by cutting out some non-essential expenses. Scratching off pizza nights with friends could, for instance, free up the required funds.
Two: Mobilise your financial resources
If credit card debt is terrorising you, you probably need a more aggressive approach to get rid of it. That means bringing out the entire arsenal of debt-neutralising tools at your disposal. The list includes any extra funds you have tucked away, tax return money, side hustle earnings, yard sale profits, plus more.
Gather it all together and target it at your credit card debt. Saving for a rainy day is all well and good, but it only makes sense when you no longer have a mountain of debt that’s growing by the minute.
Three: Queue your debt and tackle one thing at a time
Trying to fight an enemy on many fronts is a recipe for frustration and failure. Happily, there are two ways to face off with your credit card debt without getting overwhelmed. Pick your preference:
- The avalanche method. You pay the monthly minimum for all other accounts but divert any extra funds to the account with the highest interest rate. In other words, you pay off your credit card debt starting from the highest interest rate to the lowest. It’s one of the quickest ways to wipe out debt, but the results of your hard work are not immediately obvious, and some people find this demotivating.
- The snowball method. Again you pay the minimum on other accounts, but this time, the smallest balance gets eliminated first. So you pay off your accounts starting from the smallest balance to the largest. It’s motivating because you can see results quickly. But while your smaller debts are disappearing, the larger ones are picking up more interest. So you pay more in the long run than with the avalanche method.
Four: Turn to debt consolidation
Debt consolidation melds all your accounts into one, so you won’t have multiple repayments and fees clamouring for your attention. You can either:
- Take out a debt consolidation loan. This type of personal loan can pay off your credit card debt plus any other debts you might have. You then pay off that personal loan via affordable, single monthly repayments over a fixed period.
- Use a balance transfer card. These usually have a 0% interest period, but it doesn’t last. Once you move your balances from the older cards to the new one, you need to pay it all off before the 0% period kicks the bucket.
Five: Give some of your credit cards the boot
Taking two steps forward and one step back makes for slow progress. If you’re gung-ho about paying off your credit card debt once and for all, you may need to give your credit cards a very long and extended holiday.
Closing credit card accounts removes the temptation from under your nose, making your job easier. You can still keep one or two credit cards. They can be handy as long as they offer a better deal and if you can use them responsibly.
Six: Hash it out with your credit provider & financial planner
Talking to the right people can help you manage your credit card debt better. There’s your credit provider who has a vested interest in seeing you pay back what you owe. Most lenders are charitable enough to restructure your payment plan to suit you, but you have to communicate with them as soon as possible.
You can also talk to your financial planner, who can help you map out a personalised plan for clearing credit card debt so that it matches up with your bigger, long-term financial goals.
Seven: Keep up the momentum
Once you start winning the war on credit card debt, keep the ball rolling. Don’t stop to pick up crazy amounts of debt in case you trigger that famous and vicious debt cycle. You’ll need your trusty budget with you at all times. Try as much as possible to stick to what it says.
This is also the best time to start building that nest egg or rainy day fund. The next time an emergency comes knocking, you’ll at least won’t have to rely on plastic money for back up.
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