Plastic, Not So Fantastic: How To Crush Your Credit Card Debt

If you have multiple credit cards, or credit card debts as well as other debts, there are different strategies to work out which debt to pay off first, Barton says.

The first is the Avalanche Method, which involves prioritising debts by interest rate and paying off the debt attracting the highest interest rate first. “This makes the most financial sense because it can save you the most money in interest payments over the long run,” Barton says.

The alternative, the Debt Snowball Method, involves prioritising debts based on the balance size. Barton says: “Paying off smaller debts first can provide a sense of momentum and motivation, because you may be able to clear some debts quite quickly.

“Ultimately, the most important thing is deciding what strategy you want to use and then sticking to it, because paying off credit card debt can take time.”

While Aussies may be opting to put more expenses on plastic, it’s important to remember that most of us appear to be managing our credit card repayments. RBA data shows that the share of credit card balances accruing interest fell from January to March to $18.6 billion, which is 44% of the nation’s total credit card debt, and historically low.

Debt Consolidation: Personal Loans

If you can’t pay off your credit card, one option could be to consolidate your high-interest credit card debt into a type of credit with a lower interest rate, such as a personal loan.

However, Barton says your credit score will be a factor in what sort of interest rate you’d be able to get, or whether you can qualify for a personal loan at all.

She says people with a mortgage can also consider consolidating their credit card debt into their home loan, which will have the benefit of an even lower interest rate than a personal loan but comes with the risk of putting your home on the line, should you fall behind in your mortgage repayments.

Debt Consolidation: Balance Transfer Cards

Using a balance transfer card is another way to consolidate credit card debt. Under this scenario, you transfer your existing debt onto a new credit card, which offers a low introductory interest rate, or a 0% interest rate, for a fixed period, before the interest rate increases to a level more standard for credit cards.

But for this strategy to work, Barton says it’s important not to add any new debt to the balance transfer card by using it for purchases, and to focus on paying off as much debt as possible during the low or no interest period.

It’s also important to avoid accumulating new debt on the card you transferred the balance across from. “If you don’t close off the first card you could be tempted to use it again and then you can get into a bit of a debt cycle,” she says.

Use Hardship Measures

If your circumstances make paying off debts impossible, Barton says you should contact your credit card provider and enquire about their hardship provisions.

“They might be able to give you a hardship period of three to six months where they may not charge you interest, or they may even give you a period of reduced payments as well,” Barton says.

This can be a good solution if your circumstances might change in a few months, and you just need some breathing room, but applying for hardship can affect your credit rating, so it’s not a step to be taken lightly.

Once you have your credit card debt under control, or paid off completely, it’s important to avoid landing in trouble again.

Barton says that to avoid this, the first thing to do is to create a budget that outlines your income and your expenses—and stick to it—which will help remove the need to use your credit card. It’s also important to break the habit of physically using it by paying with cash or a debit card where possible.

Sometimes people opt to keep a credit card in case of emergency, and in this case, she recommends contacting your provider to lower your credit limit. But a better option is to build up an emergency fund of savings, so that if unexpected expenses crop up you don’t need to resort to credit to cover them.

Many people think cutting up a card is all that’s required to stop using a credit card, although with card payments now available on smart devices this isn’t the solution it once was.

It’s better, Barton says, to actually close the account. To do this the balance needs to be at $0, and if you have any reward points you should use or transfer them before closing your account. The next step is to contact your provider and let them know you want to close the account, asking for written confirmation or a reference number should a dispute or issue arise.

This will also avoid a new card being sent to you when the old card expires, which could tempt you into using the credit card all over again.