Credit cards are a convenient way to “buy now and pay later”. When used correctly they offer lots of additional benefits. But you need to be smart about how you use them so that you don’t get into too much debt.
These are strategies that anyone can try. Needless to say, your goal of getting ahead of credit card debt is more achievable if you cease or at the very least limit your spending on cards.
1. Pay more than the minimum monthly repayment
When managing your repayments you have three choices:
- Pay the full amount of the closing balance by the due date shown on your statement every month – by doing so you can take advantage of any interest free period on your card.
- If you can’t pay the full amount, try to pay more than the minimum repayment to limit the amount of interest charged.
- Make only your minimum repayment each statement cycle – this strategy is discouraged as interest will build up on your account, making it much harder to clear the total balance.
To see where you stand, check your Westpac credit card statement. It will tell you how long it will take to pay off the closing balance and the interest cost, if you only make the minimum payment (and you make no further purchases or cash advances with your card).
2. Pay down your highest rate credit card debt first
Sometimes known as the Avalanche strategy, the idea is to target the debt with the highest interest rate first, while maintaining the minimum repayment on any others. Paying off your highest interest credit card, which may not necessarily have the highest balance, will limit the impact of compound interest on your debts, slowing the growth of your debts overall.
Once the highest rate balance is paid off, you move on to the next highest rate card. The cash you were putting towards paying down the first debt is added to the minimum repayment you were making on the second highest rate debt. As you work down through your debts, the amount you can put towards repayments on the next debt increases with each cleared debt – creating an avalanche effect.
3. Pay off your smallest balances first to create momentum
Commonly called the Snowball strategy, it relies on human psychology – we feel we are making progress if we can get the “quick wins”. Pay off the smallest debt first and the sense of achievement encourages us to keep going and tackle the next smallest debt.
This positive feedback cycle builds momentum until all debts are cleared. Like the avalanche strategy, you maintain the minimum repayments on other debts while you work to clear the first one. Similarly, the amount you can dedicate to the repayments on the next debt increases as you clear each smaller debt.
Note however that this strategy will almost certainly be more expensive in the long-term if you have larger, higher interest debts compounding while you pay down smaller ones.
Be very honest with yourself about which credit card debt strategy will work for you. If you have the discipline and determination, the avalanche strategy will always be better from a strictly financial standpoint. But if you think you need the encouragement that comes with clearing many smaller debts, the snowball strategy may be a better fit for you.
4. Consolidating debt with a credit card balance transfer
Balance transfers are a popular strategy for consolidating credit card debt, potentially saving you money and allowing you to clear your debt sooner.
Keep an eye out for 0% p.a. balance transfer offers and take advantage of the interest free period to pay down the debt.
The path to success with this strategy relies on your ability to pay down your debt as fast as possible, ideally clearing the debt during the promotional period. You should also seriously consider cutting up your old credit cards to avoid the temptation to incur new debts.
These offers come with strict terms and conditions, so make sure you read them carefully.
5. Make your credit card repayments your priority
Make your credit card repayments a priority by setting up automatic payments each statement cycle. That way, your card gets paid off before any non-essential spending.
Read more about making credit card repayments.
6. Don’t spend more than your earn and/or free up money to pay off your debt
It’s budgeting 101 – spend less than you earn. The reality is that most people will find they have more control over what they spend than they do over increasing their income, at least in the short-term.
So start by focusing your efforts on your spending habits to see if you can cut back anywhere. Then put that extra money towards your repayments to further reduce your debt.
7. Have a goal beyond debt repayment
Focusing on a goal beyond your debts is also a good way to stay motivated. For example, your goal might be to save to buy your first home. Set-up your strategy to clear your debts and then work towards a first home deposit.
And every time you reach a debt repayment target, don’t forget to be your own cheerleader! Rewarding yourself for small wins helps to maintain motivation.