How to pay off credit card debt?

WeMoney

In February 2022, there were more than 13.157 million credit cards in Australia, bringing the national credit card debt to over $18.5 billion, equal to $1,385 debt per card. 

While many Australians can keep on top of that debt, others struggle - which is why around 6,792 Australians filed for bankruptcy in 2020–21.

Whether you need help with your personal finance or business credit cards, we'll help you pay off your card debt faster. 

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Let's get to the following commonly asked questions:

  • What is credit card debt?
  • How do I pay off credit card debt?
  • How do I stay out of debt?

Q1. What is credit card debt?

Credit card debt is an unsecured debt linked to transaction accounts. Each month, card companies let you borrow up to your limit, and then you might have to repay an annual percentage of your limit. 

You can use your credit card with every merchant until you decide to close the account.

If you borrow over your limit or do not repay on time, the company will charge you rates, fees, and penalties. However, if you have a bad credit card history, you might see your debt snowball. You should always seek financial advice if you find yourself struggling to repay.

Important: Saving money by reducing your card balance will help you pay towards your super funds.

Q2. How do I pay off credit card debt?

If you require urgent credit repair, we can help with your financial situation. Follow the below steps to pay down your debt. 

Important: If your situation is dire, and you fear the debt collection agency might come calling, seek credit counselling.

Pay on time

Make sure you pay your credit and debt repayment on time. Check your due date and ensure you pay the minimum monthly repayment. Suppose you have internet banking. Set up automatic minimum payments so you don't make a late payment by accident. The minimum is usually 2% of your closing balance.  

Note: If you're behind on your payments, you might incur a late fee, worsening your debt.

Pay as much as you can each month

If you can make more than the monthly minimum repayments, it's sensible to pay as much as possible. To determine whether you can afford to pay more, look at your bank account. You can also use a budget planner and repayment calculator to create a payment plan.

Note: Don't forget your tax debts. Use an income tax calculator to determine your total income after tax.

Cut back on your credit cards

Have you found yourself in financial hardship with a debt avalanche because you regularly overspend your credit card accounts? 

Close some of your credit cards to prevent unnecessary spending and borrowing. Transfer credit cards to debit cards and only spend what you have as you might have to pay a transfer fee. If your card company offers rewards credit cards, this is an excellent way to take advantage of the financial product.

Closing credit accounts will hurt your credit utilisation ratio and credit score, but only temporarily.

Note: If your debt is severe, you might need to consider debt management plans.

Reduce your credit limit

Reducing your consumer credit limit will help you pay off the debt in future, and with a lower card balance, you'll avoid substantial monthly debts. Additionally, lowering your credit card interest rates will help your monthly bill.

Consolidate your debt

Another option is to consolidate debt into one payment. You can do this with a balance transfer credit card or debt consolidation loans. Beware of balance transfer fees.

If you have:

You can use one loan to pay them back to relieve debt. If you're consolidating credit card debt or considering a credit card balance transfer, speak to financial counsellors.

Get a better deal

If you plan to keep a few credit cards open, negotiate a better deal with your credit card companies. 

Compare the following aspects of potential credit cards:

  • Annual fees.
  • Credit rating impact.
  • Financial protection.
  • Credit card interest rates.
  • Interest-free period.
  • Rewards card.
  • Low vs high fees.

Remember, your monthly debt will be more manageable with a low rate credit card.

Q3. How do I stay out of debt?

So, once you have dug your way out of debt, you want to stay out of it. To do that, you should first create a budget.

Calculate all your necessary expenses, including:

  • Car insurance.
  • Pet insurance.
  • Contents insurance.
  • Health insurance.
  • Life insurance.
  • Home insurance.

Stick to your budget, and don't let yourself overspend. Finally, to ensure you're free of your bad credit history:

  1. Don't take cash advances or payday loans
  2. Sign up for online banking and create automatic payments
  3. Speak to mortgage lenders about reducing interest rates
  4. When taking on new debt, such as an auto loan, use a loans payments calculator to ensure you can meet the minimum payments. Similarly, compare personal loans to get the best rates.
  5. Contact the national debt helpline about debt management plans if you're struggling. Stick to your financial counselling advice.

In summary

Before making your next credit card application, consider if you can handle credit card debt. It's best to begin improving your credit card situation sooner rather than later, so you don't need a debt settlement. 

Create repayment plans to begin paying off the plans. In future, create an emergency fund in your saving accounts to protect you if you fall into debt again.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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