As of this writing, the average debt per credit card holder in Australia is $4,600+, which as you may have noticed, is a lot of money. And unless you have a lot of money with you right now, paying off a credit card balance this cumbersome would probably take a bit of time. But fret not—with a bit of financial discipline and good planning, you can pay off your credit card debt quickly enough. Here are a few strategies that you can use:
Strategy #1: Make the highest possible payment
Don’t just settle for making the minimum payment; see to it that you put in the highest amount possible pay off your debt earlier. If you don’t, it would literally take decades before you can finally reach zero credit card debt.
Here’s an example: Let’s say your credit card had a balance of $4,000 with an interest rate of 18.50 per cent. If you put in only the $10 minimum, it would take you a mind-boggling 50 years and three months to completely repay your debt. You’d spend also $11,493 on interest—unless of course, you continued to use the card, which means it would take even longer to settle the whole thing.
If you instead pay $150 per month, you’d be able to settle your debt in just two years and 11 months, and spend only $1,192 in interest, both of which are a fraction of the original example.
Strategy #2: Don’t use your credit card/s
Every dollar that you spend using your credit card while paying off the balance is one less dollar in your payment. In other words, you’re prolonging the time you spend in debt and making it harder to pay everything off. If you want to avoid further extending the repayment period, the very least you can do is stop using your credit card.
Strategy #3: Use your savings to pay off the debt
You may not be too keen about using up your savings, but applying it to your credit card balance is actually a good financial tactic. Consider that your reserve funds, at its best, would probably never consistently earn more than 5 per cent p.a., while your credit card debt (using the example above) costs you 18.5 per cent every year.
But if you use your savings to pay off your debt, you can get a return of 13.5 per cent (18 per cent minus 5 per cent). This, however, doesn’t mean that you should keep using your credit card and splurge, only to pay it off with your rainy day funds.
Strategy #4: Pay your bill fortnightly
Did you know that if you pay your credit card fortnightly (i.e. every two weeks), you can shorten its repayment period? You probably already know that there are 52 weeks or 26 fortnights in a year. If you pay every fortnight, this will be equal to 13 monthly repayments (26 divided by two), versus the normal 12 if you choose to pay monthly. Paying fortnightly means you make one extra repayment every year.
To further drive home the point, let’s take the example above (see strategy #1). As stated, the credit card would take two years and 11 months to repay. But if you make fortnightly repayments, the debt would be shortened by two months, and would instead take two years and nine months to fully pay off. It may only be two months, but when used in conjunction with the other strategies here, you can shorten your repayment period significantly.
Strategy #5: Negotiate with your card provider
If you have a considerably sized credit card balance, you may want to talk with your card provider. Since the industry is so cutthroat, all lenders want to keep their customers. So when you discuss your concerns, tell your card provider that they could eventually lose you to another that would offer better interest rates if they don’t help you out with your credit card’s balance terms.
Strategy #6: Consolidate your credit card debt
Does the credit card you’re trying to pay off have a high interest rate that makes it difficult for you to pay more the minimum? Then lower it by consolidating your credit card debt through a balance transfer. With a lower interest rate, you can pay your balance more quickly without having to increase your repayments.
If you can find a credit card with a zero per cent introductory rate, you can save even more time and money. Our tip? Look for one with the lowest rate and longest introductory period so that you can make the most of the opportunity. Take note, however, that a transfer usually comes with a fee worth 3 per cent to 5 per cent of your balance, so make sure you consider this when determining whether the effort is worth it.
Strategy #7: Choose which card to focus paying first
When paying off several credit cards at the same time, you’ll have to decide which one to focus on, then just pay the rest with their minimum. This allows you to eliminate debt more quickly than spreading your repayment budget into several cards and stay in debt longer.
There are a couple of ways to go about it: you can focus your payments on the card with the smallest debt, or the one with the highest interest rate.
By focusing on the card with the smallest balance, you can eliminate individual debts more quickly, and this would give you a great psychological boost. On the other hand, if you concentrate your efforts on the card with the highest interest, you may end up saving more money since you’ll pay off the most expensive debt first.
In the end, however, there is no one correct option. Just choose the strategy that would make it easier (and hopefully, quicker) for you to pay off your credit card debt.
Strategy #8: Track your expenses
Want to take full advantage of your income to pay down your card debt more quickly? Then track your expenses and try to account for literally each dollar you spend by keeping all your receipts. Doing this allows you to see where your money goes and determine which expense you can get rid of. You can then use the savings to make additional payments for your credit cards and pay your debt more quickly.
For instance, if you noticed that your coffee shop receipts add up to a little over $100 every month thanks to your regular latte habit, then stop spending for coffee and devote the amount to paying off your credit card.