Becoming overwhelmed with your credit card debt is never a good feeling, especially when you don’t know how to start paying it off. While it is hard to control some of the factors that lead to credit card debt, there are strategies that you can implement to start taking control of your finances.
The sooner you start managing your debt the better off you’ll be in the future, so it’s important that you start taking steps to manage your debts as soon as you feel like they’re escalating.
Factors That Can Increase Credit Card Debt
Credit card debt can be caused by a variety of factors, some of which are more manageable than others. It’s useful to find out what could be causing your debt to escalate, as it can affect the strategies you use to start minimising your debt.
Being aware of changes to your limit and credit rules is always important and can put you once step ahead of your debt. If your credit limit has recently decreased, you may find that you’re spending over your new limit. If you try to spend over your limit your transaction may just decline, but depending on your lender and type of card the transaction may go through and you will incur significant fees. If your limit has recently increased, you may be more tempted to spend up to your limit, and may struggle to pay back your expenses later on.
Unexpected expenses can hit anyone, no matter how prepared you are. For many people who use credit, circumstances such as losing their employment, health issues, and natural disasters or other unexpected events may lead to them having to increase their credit limit or overspend. These types of situations are very hard to plan for or avoid, but creating a consistent saving plan can help you save towards an emergency fund in case you need to make an urgent and expensive purchase.
For some credit card users, holiday spending causes them to lose control of their finances, and they can struggle to pay back their debt. Some of the gifts or vacations that many people are used to buying and planning have become more expensive the past few years, which is important to consider. It may be worth adding gifts and holiday expenses to your budget throughout the year so that you can better plan for them. If you are planning a getaway on a budget, consider going local and avoid tourist season.
Interest rates have been rising all year, which may be impacting your debts. It’s important to monitor interest rates on your loans and debts, particularly if you have accumulated multiple high interest credit card debts. Similarly, cost of living expenses have also been increasing recently, so it may be worth creating a budget and identifying areas you can save.
Create A Debt Repayment Plan
The first step to taking control of your debts is to create a plan. While it can be daunting, a plan will help you feel more in control, and is something you can pass on to your lender, creditor, or financial counsellor.
1. Create a budget
Record all your income, including your salary and benefits you may receive, along with your debts and expenses, including your rent or mortgage payments, bills, loans, and credit card debts. Don’t forget to include other expenses such as groceries, education, subscriptions, and childcare.
2. Start trimming
Make a note of expenses in your budget that you may be able to reduce or eliminate, such as a subscription service or expensive groceries. Once you’ve done that, you’ll be able to allocate some money to paying off your debts.
3. Order your debts
If you have multiple debts, now is the time to sort them by their risk and importance. Some ways of ordering your debts could be the amount of interest they charge or the amount of debt you have accrued on them.
4. Start paying off your loans
Now you can start paying off some of your loans. The snowball method, suggested by Moneysmart, is when you fully pay off your smallest debt before moving to the next one.
“The quickest — and most motivating — way to get out of debt is the snowball method. You start small, and pay off your debts one by one”
You’ll have to try to pay off the minimum amount on all your other debts when they come due, but using that extra money you found in your budget to pay off one loan at a time can be more motivating than trying to pay off all your debts at once.
This method may not be for everyone, as you may feel more at ease paying off your high interest or large debts first.
5. Ask for help
This may make you nervous but asking for help is very important and can get you back on track faster. Once you’ve started paying some of your debts and have a budget sorted, reach out to your lender or creditor. Lenders and creditors are often able to create arrangements that can help you get your debts paid off, such as reducing or deferring payments or reducing interest, especially if they see you have started paying off your debts already or have a repayment plan.
If you are struggling to create a repayment plan or need some extra help, reaching out to a financial counselling service like the National Debt Helpline can be a big help.
Helpful Calculator Tools
When making a debt repayment plan or budget, using a calculator tool can be a big help.
A budget calculator is a huge help when preparing your budget for your debt repayment plan. You can add in all the income you have and expenses you need to make, and your results are displayed weekly, monthly, and annually.
Once you’ve organised your debts, you may want to create a savings plan with a savings goal calculator. Starting a frequent savings habit can get you in the routine of managing your finances, and gives you a little more security in case anything comes up in the future.
If you have a home loan, a repayment calculator can help you plan out how much and often your mortgage repayments will be. It’s definitely useful to take note of these in your debt repayment plan, and in your budget.
Tips to Pay Down Credit Cards Debt
Consolidating Debt
- Balance transfers: Balance transfers happen when you transfer the debt you have on one of your credit cards to different card. Most cards will offer a lower rate for a limited time, which may help you pay off your debts. Be aware though that once the limited time has expired, the card may revert to a higher rate, potentially even higher than on your original card. Balance transfers aren’t for everyone, so if you are considering one make sure you are able to pay off your debt during that low rate period.
- Lower your credit card limit: As long as you continue to monitor your card, lowering your credit limit can help you reduce debt later on. Lowering your limit can help you stick to your budget and remain in control of your finances, and you’re reducing the risk of being saddled with a big debt in the future. However, lowering your credit limit will give you less spending power in case you have to make a large purchase, and if you do spend above your limit you may have to pay significant fees.
- Pay more than the minimum: As credit card debt can accumulate high interest, paying these off as soon as possible will help you avoid huge debts. The best way of doing this is to pay more than the minimum amount, which can potentially shave off years and hundreds of dollars. Increasing your payments can stop your debts from accumulating, so allocating some money in the budget for increased repayments is worth it.
- Make multiple payments within a repayment period: Following the last point, making frequent or extra payments can save you a lot in interest in the long run. If your creditor allows you to make more than one payment in a repayment period it may be a good idea to jump on that chance, as you may be able to get your debt out of the way much sooner than expected.
- Consolidate loans: Consolidating your credit card debt into one card or personal loan may be a better option. Debt consolidation can make your repayments more convenient, and will leave you with one lender or creditor rather than multiple different creditors. Be sure to do some more research into whether consolidating is right for you, and don’t forget to compare the different interest rates available.
- Cancel cards: If you do choose to consolidate your debts, don’t forget to cancel cards or accounts you no longer use. This can help you avoid accumulating more debt and receiving empty or inactive account fees.
- Remove additional users: Credit debt can get out of control quickly, so the less users you have on your account the easier it is to stay in control and track your purchases. Instead, you may want to consider opening a joint account with another person, which is less risky.
- Earn extra cash: Are you due for a raise? Earning a little more can certainly help you manage your debts, so now might be a good time to have that pay review. Some businesses also offer programs to help their employees upskill, which could lead to a higher salary or even a better position.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.