How to pay off credit card debt faster

Key points

• Stopping the balance growing comes before the repayment. While you're carrying a balance, most Australian credit cards charge interest on new purchases from the day you make them.
• A fixed repayment beats paying the minimum, because the minimum falls as the balance falls. On a $5,000 balance at 20.99% (illustrative), $200 a month clears it in 34 months, while minimum-only repayments leave ~$780 owing after 50 years.
• Going at the highest rate first usually costs the least overall, and going at the smallest balance first finishes an account soonest. The difference in total cost is often smaller than the difference in whether you keep going.
• Minimum repayments on every other debt come first, always, then a small buffer, then extra repayments on the credit card you're targeting.
• If your income moves week to week, set the fixed repayment from your reliable floor rather than your average, and add a top-up in the better weeks.

Paying a credit card off faster is mostly about the order you do things in, and the first step isn't actually payment at all. Before the size of your repayment matters, the balance has to stop growing.

So here we go through the sequence from there, with worked numbers on a fixed repayment against the minimum, plus what to do if your income changes week to week or several balances are involved.

First, stop the balance growing

While you're carrying a balance, most Australian credit cards charge interest on new purchases from the day you make them, with no interest-free window, until the account is back to being paid in full. Why that happens has its own explainer. What it means for your plan is that every purchase you put on that credit card while you're clearing it adds to the amount you're trying to reduce.

So while you're paying it off, take that credit card out of everyday spending. Groceries and fuel go on your debit card, and any direct debits and subscriptions sitting on the credit card move across to a transaction account, because those add to the balance every month without ever feeling like spending. If the credit card lives in your wallet, moving it somewhere less convenient makes the decision once instead of at every checkout.

Pro tip: Connecting your accounts in WeMoney shows every recurring payment coming out of your credit card in one list, so you can see what needs moving without going back through months of statements.

This is temporary, and it's what makes the rest of the plan work. A repayment plan running alongside continued spending on the same credit card can leave the balance close to where it started.

Choose a repayment you can hold every month

Once nothing new is being added, the size of your repayment is the biggest thing you control.

Minimum repayments are set by credit card issuers, and a common formula is the greatest of any amount you're over your credit limit, 2% of the closing balance rounded down, and $25 – your own credit card's formula is on your statement. Because it's a percentage of what you owe, it falls as the balance falls. A fixed amount works the other way: as the balance comes down, the interest charged comes down with it, so more of the same repayment lands on what you actually owe.

Below is what that difference looks like on a $5,000 balance (illustrative).

The figures assume a $5,000 starting balance at 20.99%, no new purchases, no fees, and the rate unchanged throughout, with the minimum taken as the greater of 2% of the closing balance rounded down and $25. Your own credit card's rate, minimum and fees are on your statement.

In the first month the minimum comes to $101, and $87 of that covers the interest, so about $14 comes off the balance. A fixed $200 puts about $113 against it, and the gap widens every month after, because the minimum keeps shrinking while the fixed amount doesn't. What different repayment amounts do to a balance over time we've set out separately.

$200 a month is ~$46 a week, and the right number for you is whatever version of that you can still make in a hard month.

Set the repayment at an amount you could still make in a tight month, rather than the most you could manage in a good one.

Setting it high and dropping back to the minimum twice usually costs more than setting it lower and never missing. Once you've picked the amount, automate it for the day after you're paid, so it goes out before the rest of the month's spending. Paying extra on top in a good month is completely fine, because a one-off $300 comes straight off the balance. How much sooner regular extra repayments could get you there is worth working through on its own.

Which balance do you attack first?

Either the highest rate or the smallest balance (both are reasonable, and which one suits you depends more on your situation than on the arithmetic). Going at the highest rate first usually costs the least overall, because the most expensive debt stops charging you soonest. Going at the smallest balance first gets you a finished account soonest, and finishing one completely is what keeps a lot of people going.

The honest position is that the difference in total cost between the two is often smaller than the difference in whether you stick with the plan. If you've been paying several balances down for a year and none of them has finished, the smallest balance is probably the better call. If the rates are a long way apart, starting with the expensive one may well be worth the wait, and if they're within a percentage point or two, take the finish that arrives soonest.

Whichever you pick, the mechanics are the same: minimum repayments on every other debt, and the fixed repayment you chose above going to the one you're targeting. What changes when that first account goes down to zero, and whether to close it afterwards, we've covered separately, and if you want to weigh the debt snowball and debt avalanche methods against each other properly, that comparison has its own place too.

Protecting the essentials while you do it

The order in which you tackle the issue is important. Minimum repayments on everything else come first, always, because a missed minimum costs fees, interest and credit damage that outweigh anything a faster payoff saves. Maintaining a small buffer comes second, before any extra repayments, because if there's no cash between you and the next car repair, the repair goes on a credit card and undoes months of the plan – the pattern our members have described to us again and again. A few hundred dollars does most of that protective work, and how to build a buffer while you're still paying off debt covers what holding that cash actually costs. Extra repayments on the credit card you're targeting come third.

Sending every spare dollar at the balance is faster on paper, and it's also the plan that has to be restarted every time something breaks. If minimum repayments plus essentials already take up everything you earn, no ordering of the money fixes that, and the right move is your providers' hardship teams and the National Debt Helpline on 1800 007 007, early rather than after a missed repayment.

If your income changes week to week

If you're on casual shifts, commission or contract work, setting the fixed repayment from your average income is what breaks the plan, because the average includes weeks you won't get. Set it from your reliable floor instead – the amount you're confident of bringing in across a quiet stretch – and work the repayment out from that. It'll feel too small on a good week, however it's the amount that still goes out in a quiet one. Then add a top-up whenever a better week arrives, which comes off the balance the same way an extra repayment does. Building a fuller repayment plan around an income that moves has its own place to be worked through properly.

The plan above assumes there's one balance you can get at. Where several balances with separate due dates and separate rates are what makes it hard to sustain, whether reorganising them into a single repayment would help is a separate assessment, and one worth working through properly on its own.

Once your accounts are connected in WeMoney, the balance you're paying down sits beside your other accounts, so you can watch it come down each month without digging out a statement to check.

Sources

• Moneysmart: Credit card calculator
• Moneysmart: Get debt under control

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.