Ways to Reduce Credit Card Debt

Each debt management solution has its own benefits and implications. Here are some steps to help you navigate through available finance management options.

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How to Manage and Reduce Your Credit Card Debt

Credit cards can be convenient tools for managing payments. You don’t have to carry around cash to make purchases, and you can take advantage of special reward-program bonuses. However, all too often credit cards are used incorrectly. In an ideal world, everyone should pay off their credit card balance in full every month.

It’s usually best to avoid using your credit card(s) to fund purchases for the medium term, as interest rates are much higher for credit cards compared with other types of personal financing. However, if you’re one of the many people who have some outstanding credit card debt, keep in mind that it is possible to get your debt under control and pay it off sooner rather than later. The strategies and insights in this guide will show you just how to do that.

Choosing a credit card

Your journey towards better credit card debt management starts when you’re choosing a credit card. Before applying for one, take time to understand how credit cards work, read the key facts for your credit card, and be clear on the terms and conditions of the card program.

The basics of how credit cards work

No interest is charged on outstanding amounts as long as you pay them off within the interest-free period. Credit cards also allow users to borrow money by delaying full repayments. Users can borrow up to their credit limit as long as they continue making the required minimum monthly repayments, which is usually around 1-4% of the total outstanding amount.

You can also use your credit card to access a cash advance, which means you can withdraw cash on your credit card. Cash advances attract a fixed cash advance fee as well as ongoing interest charges. This, along with the fact that credit cards are widely accepted by retailers, makes them a convenient way to pay for goods and services. However, interest rates are much higher for credit cards – for both purchases and cash advances. The longer you take to repay your credit card debt, the more interest you will ultimately pay.

The Key Facts sheet

Credit cards in Australia are subject to certain rules and regulations. If you’re applying for a credit card, the institution is legally required to provide you with a ‘Key Facts’ sheet. This sheet will tell you all the key facts you need to know about your new credit card, so use it to familiarise yourself with the following:

  • Minimum repayments – This tells you how minimum repayment will be calculated for your new credit card.
  • Interest rates – The interest rates you will be charged for purchases and cash advances. You can also find out the interest rates for any balance transfers, if the lender is offering them.
  • Promotional interest rates – The key facts sheet should also tell you about any special or promotional interest rates the institution is offering you.
  • Interest-free periods – This tells you how long – from the first day of the statement period, not the statement-issue date – you have without being charged interest. Usually it’s around 44 to 55 days from the statement start date, or around 14 to 25 days after the statement is issued. If you pay off your credit card balance in full every month, you don’t need to worry about this. Some cards offer no interest-free days, but combine this with a lower annual fee and lower interest rate.
  • Annual fees and late payment charges – The Key Facts sheet should outline the program’s annual fees, along with any late payment charges you could incur if you don’t make the minimum payment on time each month.

Other terms and conditions

Be aware of other terms and conditions before you apply for the credit card. These can include fees for exceeding your credit limit, as well as other surcharges that certain merchants may choose to pass on to you for each purchase.

Signs you need better credit card debt management

Credit card debt management centres around your saving, spending, and budgeting habits. Check your credit card statements over the past six months or more. If you’ve maintained an unpaid credit card balance in the past six month or for longer, that could be a sign that you need to manage your debt more effectively.

If your balance has been steadily increasing, that’s also a sign that you could do with a concerted credit card management strategy. Using your card for advances, buying things on credit and without having saved up for the items first, and impulse spending – these are all signs that you need better credit card management.

Strategies for better credit card management

1. Get organised and take charge

Many people with outstanding credit card debt don’t even have a clear strategy for repaying the debt. By simply getting organised and committing to taking charge of your debt with a specific action plan, you’ll have taken the single most important step to regaining control of your credit card situation.

2. Pay on time to avoid extra fees

Institutions charge extra fees if you don’t make at the least the minimum repayment for each statement period. Avoid having to pay these extra charges by paying on time, every month. Set up a direct debit system to have the money deducted from your account and allow sufficient processing time to ensure you’re not charged.

3. Pay more than the minimum each month

Always pay as much as you can afford to each month, and pay more than the minimum required amount. Credit cards are designed to encourage you to delay repayment, as the minimum repayment for each statement period is usually as little as 1-4% of the total outstanding amount. Yet, because interest rates can be as high as 20% or more, a couple of thousand dollars can quickly spiral into a significant amount of credit card debt.

You can motivate yourself to pay more the minimum amount by working out how much interest you’ll save by paying more than the minimum. For example, if you have $2,000 of credit card debt, you’ll only be required to pay $40 each month, at minimum. However, the interest may be 18% on that card, which means you’re paying an extra $360 each year to service the $2,000.

Your credit card statement will probably provide some information about how long it will take you to repay the full amount if you only make the minimum repayments. On a $2,000 debt with an 18% interest rate, you’ll end up paying $5,961 over 18 years and 8 months.

4. Start with the highest or lowest debt first

If you have multiple credit card debts, you could find yourself more motivated by paying off the highest debt amount first. Alternatively, you could be the type of person who prefers paying off the lower outstanding balance first, as you’ll have one less credit card debt to manage that much sooner than if you attempt to pay off the higher amount. Which route you choose will depend on your individual personality.

5. Target higher interest rate cards

Always target the higher interest card first, as you’ll end up saving more on interest and be able to pay off the debt in a shorter period of time.

6. Reduce your limit and close off accounts

As you pay down your credit card debt, call up your lender and reduce your credit limit. This removes the temptation to make purchases on your credit account. If you have multiple cards, consider closing extra accounts off when you’ve paid each off, and keep only one or two cards for emergencies.

7. Use a credit card calculator

Credit card calculators are excellent tools for helping you understand and manage your credit card debt. The Australian government offers a simple credit card calculator that lets you check repayment times and understand the impact of only making minimum payments. The site also offers a multi-loan calculator for working out multiple debts.

8. Avoid special offers

If you’ve given your lender permission to send you credit-limit-increase offers, contact them to withdraw your permission so you’re not tempted into accepting ever higher limits and incurring even more debt. Other special offers, such as honeymoon rates on balance transfer that revert to much higher rates, should be avoided if you’ll end up worse off.

9. Consolidate your loans

Debt consolidation could help you pay off your credit card debt more quickly. You could roll it into a new mortgage, personal loan, or a single credit card balance. But you should always first check that you’ll actually end up paying off your debt more quickly before you consolidate it, so that you save on interest and charges.

10. Transfer your balance

Some lenders offer 6- or 12-month (or more) interest-free periods if you transfer your credit card balance to them. This can help you save on interest and pay off your debt more quickly. Always check that you’ll end up better off after the balance transfer by accounting for after-interest-free-period rates as well as any additional fees and charges before committing.

11. Use cash to make purchases

If you know that you aren’t good with budgeting and repayments, then it can be worthwhile to go cold turkey and lock away your credit cards. Use them only for re-occurring bills or payments that you know will be paid off every month. Withdraw a fixed amount of cash each month and use that for all your purchases to avoid the temptation of using your credit card.

12. Budget and plan

Ultimately, getting your credit card debt situation under control is possible if you’re willing to do a bit of budgeting. Budgeting is essential because it shows you how you’re spending your money, and allows you to make smarter spending and saving choices.

Track your spending from day to day at the start, and then review your budget weekly as you become more aware of how you’re spending your money. This way, you can bring your debt situation under control and, in the process, develop better financial habits for life.

Greg Burke is Managing Director at My Debt Help, and has held this role for over 11 years. Greg is well educated in all areas of debt management and offers advice on this subject via the My Debt Help Blog, as well as contributing to other financial publications.

You may also like to read this article about debt consolidation.

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The review "Ways to Reduce Credit Card Debt" was last updated on 17/04/2015.