Paying off your dreaded credit cards

While it might feel sad to admit, debt is your luxury.

Some years ago, I had $35,000 in credit card debt. As a single mother with a daughter at a good inner-Melbourne school, I was trying really 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 too.

It took me years before I started getting back on my feet financially and even longer to let go of the shame that came from being out of control with my spending.

The worst thing about credit card debt is that you can probably barely remember what you bought with it!! But there’s no point dwelling on it or feeling sorry for yourself because if you’re anything like me, that will probably just make you want to buy something bright and shiny to make yourself feel better. It can become a pretty nasty cycle of not knowing how to get out of debt.

You’ve probably tried again and again and again to get on top of your debt, but credit card bills have a way of creeping back up. I’ve been there. And I’ve learnt the first step should always be to forgive yourself. Give yourself a big pat on the back for using the resources you had available. Then it’s time to step out of your shame bubble, start taking back control and change your beliefs about money.

The truth is, getting rid of card debt just takes focus and patience. Through my work as an independent financial advisor, I’ve learnt that with the right approach, you can pretty quickly overcome your list of limiting beliefs about money and discover how to set up a budget that works for you.

Getting on top of your debt doesn’t mean you have to throw out every card you own. In fact, I have a credit card for travel (with no international transaction fees and a small annual fee) and another one for online business purchases. Both cards are useful, but I don’t keep them in my wallet because I don’t want to fall into the money mindset of using them every day.

Instead, I chose to take a more controlled approach to paying off my credit cards and here’s how you can do the same:

Check your debt

Look on the first page of your card statement to find out how long it will take to pay off your debt by paying the minimum amount each month. This is usually around 2.5% of the outstanding balance. That means if your card is maxed at $10,000, you will have a $250 minimum monthly repayment.

Try to increase these minimum repayments to somewhere between 5% and 15%, or just the maximum you can reasonably afford so you can smash that debt ASAP!

Cut up your credit card

If you don’t have it, you can’t use it. This was the best approach for me and the easiest way to set up a budget and stick to it.

Lower the limit as you pay off your debt

When I started doing this with my cards, I eventually got myself to a limit that was just under a month’s net wages. By only letting myself spend less than I earned, I knew I would never spiral out of control again and could start kicking money goals.

Make the motivation to pay down your cards invisible

Calculate how much you can afford to pay above the minimum payment and then set up a weekly budget that includes direct debit to the card. It’s important to remember that card payment dates can vary, so I always recommend calling your card company to discuss which date each month is the safest to schedule your payment.

These next two tips are quick fixes. They’re definitely not my preferred way of doing things, as the temptation to draw against the card is still there. But they can work.

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 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 than a credit card. However, extending the term of your loan means you could be paying a lot more in the long run. For example, adding a $20,000 debt consolidation onto a 30-year loan at 4% a year will cost you $24,000 in interest. That’s why it’s important to tread carefully with this and always try to pay it off sooner at the lower interest rate, if you have a loan that allows additional payments.

It’s also important to read the fine print because the interest is usually charged at a much higher rate if it’s not paid off by a specific date. And if you have multiple card debts, start by focussing on the one with the highest rate/lowest balance. There are plenty of calculators online (Try Dave Ramsay) to play around with some alternatives too.

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 or small interest repayments for a low fee over a fixed period may be all you need to get rid of your debt. Say you owe $10,000 on a card and it will cost you $200 to balance transfer onto a low-interest card with a fixed low-interest period (maybe 2% over 24 months), then you will then need to make $425 monthly payments to pay it off.

Afterpay Vs Credit Card

Given the high rates on most cards, it is seriously worth getting rid of them. Be careful with replacing card debt with other types of debt such as ‘buy now pay later schemes’. I’m constantly asked if AfterPay is bad for credit rating, and the truth is it’s basically the same thing as a credit card but with a different name. That means it’ll give your credit file multiple hits and reduce your credit score too.

Knowing how to get out of debt is the first step. But it’s important to realise that getting back on your feet financially can be hard. I know I have gone backwards in the past by using a card “for an emergency”, before falling into the same money mindset trap again. Remember that no one gets it right all of the time so be kind to yourself along the way.

Another tip: Look at Canstar to compare loans before committing to a credit card payment strategy.

Oh, and one more! Stop making purchases just for the perks. You might be earning points, but these schemes almost always favour the card company. They work on the premise that you’ll actually spend more money than you need to for a future purchase – that you probably don’t even need. Let’s do the maths. Say you score 1 point for every $1 you spend, and you’re hoping to buy a new appliance with your rewards. If you need 5,000 points for that ‘free’ kettle, is the $5,000 kettle really worth it?

Phoebe x