How to Get Out of Credit Card Debt

Whilst credit cards can be handy in certain situations, they can also be a financial trap, allowing you to spend a rolling limit of cash that you may not actually have. Fortunately, there are ways to get out of credit card debt or change to more suitable products that allow you to reduce the total debt faster.

In this article, we discuss 5 tips to help you pay off your cards and get out of the credit card debt cycle.

 

1. Make extra repayments

This case study from Money Smart shows that paying just the minimum amount can leave your credit limit with no end in sight. By diverting any extra funds you may have to reducing your credit card debt, you will significantly reduce the interest paid over time.

Emma owes a total of $10,000 on her three credit cards. The interest rates on the cards average 20%. The minimum monthly repayments for the three cards total $200.

If Emma only makes the minimum repayments, it would take her 66 years to pay off her debt and she would pay over $44,000 in interest.

Instead, she decides to pay $300 a month towards her debt. This will pay off her debt in about 4 years, and save her almost $40,000 in interest.

 

2. Destroy the cards

The easiest way to stop increasing credit card debt is to get rid of the cards completely. Destroy the cards safely by cutting through the magnetic strip and chip and disposing in a secure bin. If you truly need to keep a card for emergencies, place it in a drawer in your house and not in your wallet, so it’s not accessible.

 

3. Pay off lowest balance first

If you have multiple cards, pay off the lowest balance first. Whilst it may seem counterintuitive, this strategy allows you to hit your first goal sooner so you can close the card completely. You are also more likely to stay on track as you see your efforts making a real impact.

To structure repayments, work out the total amount that you can afford to pay toward your credit card debt every month. Then, pay the minimum amount on your higher limit card/s and the total remainder of funds toward your lowest limit card.

Example: Timothy has 3 credit cards with limits of $1,500, $3,000 and $3,500. He can afford to make repayments of $300 per month. The minimum amount due on the higher limit cards is $71 and $98.

Each month, Timothy makes the minimum repayments to his higher limit cards and puts the remaining $131 towards the card with a limit of $1,500. Once repaid in full, he will close the card and put that amount plus the minimum repayment of $71 toward the next lowest card.

 

4. Consolidate credit card debt to a personal loan

A credit card operates as a rolling line of credit, whereas a personal loan requires you to make regular repayments to ensure that the principal loan amount decreases. Personal loans usually also have lower interest rates, so you may save on interest over time.

 

5. Get help if you need it

If you are struggling to repay your debts, act quickly to get help. Start by contacting the financial institution and explaining your situation – most are happy to work with you to get back on track. The Australian government also offers free financial counselling to anyone facing struggles.

Ellie Shedden