If credit card debt is keeping you awake at night, you’ve got company. It’s our most common form of household debt with 7,765,000 credit card holders (18 years and older) in Australia owing close to $32 billion in total.
That means an average of just over $4,000 debt per cardholder and about $700 in interest paid to the bank per year based on an interest rate of 15 to 20 per cent.
No doubt you can think of plenty of other ways you would prefer to spend $700. So, here are 7 practical steps you can take to change your unhealthy habits, break the debt cycle and the stress that comes with it.
- Stop using your credit card/s. Cut them up if you have to, and take a long hard look at your spending while you’re at it. Are you splurging on things that give a short-term high but that you don’t really need? Time to nip that in the bud.
- Pay more than your minimum repayment, even if it’s an extra $50 or $100 per month. To see how much difference it could make in the interest you’ll pay over time, use this MoneySmart calculator.
- Set up automated payments to your credit card each payday. First you’ll need to total up your credit card and other debts, as well as your monthly expenses and then compare that to your income to see what’s left over for repaying the cards. (I.e. Budgeting 101.)
- If you have more than one card, pay off the one with the highest interest rate first. The Americans call this the “avalanche” method and it’s the most efficient because it eliminates interest more quickly. Or you could try “snowballing”: tackling the one with the smallest debt first until it’s paid, and then the next smallest; and voila, you gain momentum as your debts disappear which motivates you to keep going.
- Transfer your balance to a card that offers a low- or zero-interest period. The key is to be disciplined and pay off the amount you’ve transferred within that nominated low-interest period, or a new, and higher interest rate might kick in. There are other traps to be aware of: the new card may have higher fees and charges; the new lender may quietly increase your credit limit; and you will need to resist adding anything extra to the card. Before making this jump, check out this article on the pitfalls of zero dollar balance transfers.
- Talk to your bank or credit card provider. Sometimes they’ll vary your arrangement or negotiate your terms if you can show you’re experiencing financial hardship.
- As a last resort, there’s bankruptcy. It’s a detailed process with long-term consequences and means you are legally declared unable to meet your debts. For low-income earners who don’t want to declare themselves bankrupt, there are also debt agreements.
You can also talk to your employer. They understand that debt can get away from even the smartest people and might be able to help you navigate your way out of a stressful situation. Also, check out our blog for more information on how to reduce unhealthy debt.