Helpful tips to get credit working for you, not the other way around.
Credit cards can be a handy way to pay for goods and services. They act as a short term cash flow by giving access to borrowed money. However if you’re not careful, it’s easy for the credit card debt to get out of hand.
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If, like many Australians, you’ve run into trouble with your credit card debt, here are some tips to help you get back on track.
- Check your credit cards
As a general rule, if you’re not paying off your balance in full every month, you might consider switching any rewards/high interest cards to low interest rate cards to reduce the amount of interest you’re paying. Contact your card provider for help moving to a lower interest card.
- Review your budget
Are there any expenses you can reduce or cut out while you focus on paying your credit cards off? Anything you can save on expenses can help make a dent in your card payments.
Do you know when your bills for credit cards and utilities are due? Paying on time reduces the interest you pay and the late payment fees you might be liable for.
- Start using cash
It’s easier to keep track of how much you have to spend or when you’re running out of money if you stick to using cash to pay for things. Put the card in deep freeze (perhaps even literally!) and experiment with using cash while you get back on track.
- Pay as you go
One of the biggest temptations for using credit cards is unexpected expenses. Getting on top of your finances and planning for bills can help a lot. For example if you know your gas bill arrives quarterly, get a copy of your last bill and work out how much to pay each pay period so when the next bill arrives it’s mostly paid. Most utilities providers are happy to take part payments like this by direct debit or BPAY ® so long as they’re made before the bill is due. Check with your provider to see if they do.
- Set repayment priorities: highest interest first
If you hold multiple cards, set up a plan to pay the minimum on each card, then put anything extra you have onto the highest interest rate card. In the long run it can save you a lot of money on interest. Once this card is paid off, take that money and apply it to the next highest interest rate card, creating an even bigger payment onto that card. This is known as the ‘snowball effect’.
- Set repayment priorities: small balances first
Another option some people choose is to pay out smaller balances to reduce the overall number of payments being made. This can help simplify your finances and the time it takes to manage your budget. It can create a quick win and give you the mental motivation to keep focused on your debt repayment goal. It’s important to remember that this is a more expensive option than the snowball approach as your highest interest might not be the lowest balance.
- Auto pay your credit cards
Consider setting up automatic payments for your credit cards, so that as soon as you’re paid, your bills get paid too. This helps because it removes the temptation to buy other things with money that needs to go to your bills. Just remember that if you’re still spending on these cards, the minimum payments will change. Options are to stop spending and pay the minimum amount on your last statement, or set a payment equal to the amount you’d need to pay if you've reached your credit limit. Your credit provider can help you understand what this amount is.
- Close accounts you don’t need
As you pay off debts, closing the accounts can help your overall financial position because you can’t be tempted to use the credit again.
- Special balance transfer offers
Transferring existing credit card balances to a new card with a lower introductory rate can give you breathing space. If you choose this option, it’s important to keep paying as much as you can onto the loan or you’ll just end up facing the same problem when the promotional rate ends. Stay focused on paying off the debt during the promotional period as interest rates usually revert to a higher cash advance rate when the promotion period ends.
- Reward your progress
Forming good habits works best when we reward our good behaviour along the way. If you have a goal, think of ways to reward yourself when you reach your target. Keep goals realistic and consider having both short term and long term goals. That way your rewards can frequently reinforce your habits. Are you the sort of person who will benefit more from having a debt repayment chart and ticking it off? Or indulging in small (no or low cost!) rewards along the way?
- What will being debt free help you do?
Chances are you’re having to turn down doing some fun things at the moment that are out of your budget. It’s normal to feel frustrated and annoyed about that. It can help to have a clear picture in mind of what being debt free will allow you to do. Will you be able to take that dream holiday? Maybe buy your first home or extend your current one? Keeping the goal in mind can help you stay focused and motivated.
- Consider a consolidation loan
This is a specific loan to help bring all of your bills together into one easy payment. Getting your finances in order like this can help put your mind at ease. It’s critical to remember that you’ll need to close your other accounts or you risk getting back into the same position, or even worse.
- Get help
If you’ve been trying to get your debts under control and are still going backwards, consider talking to your credit provider for support. They may be able to freeze your payments for a period of time while you get back on track. Financial counsellors can also help with advice on what to do next, often free of charge.