Credit card debt is one of the most painful personal debts for Australian households. The rate you repay is very high (usually around 20% +) and it is extremely easy to accumulate. Banks are very happy to offer credit cards to us and then allow us to easily increase our card limits. Why? Because credit cards are a real earner for them and their shareholders.
This approach to credit cards has led to Australians as a nation accumulating $27.2 billion in credit card debt as at November 2019 (based on official statistics from the RBA). As mind blowing as this figure may seem, this amount is actually $2.45 billion less than what the total was in November 2018.
In this article we are going to talk about two strategies you can use to get yourself out of credit card debt sooner.
The two strategies are:
- Lowering the interest rate that you pay
- Paying as much as you can over the minimum repayment each month
Simple I know, but it is often the simple strategies that work best when it comes to finance.
When you reduce the interest rate you pay on an outstanding debt, what you are doing is reducing the minimum repayment you have to make on that debt each month. This means you have better cashflow and more money in your pocket each month.
But this also means that you have more each month to put towards your debt repayments. Meaning that if you stay disciplined and continue repaying the same amount of money that you were previously paying towards your debts each month, when your interest rate was higher, you will be able to knock large chunks off the outstanding debt and get out of debt sooner.
You have $10,000 in credit card debt at an interest rate of 20% – your minimum monthly repayment would be approx. $204/month.
If you reduced the interest rate on your card to 1.99% – your minimum monthly repayment would be approx. $45/month.
This saving in interest equates to $159 each month or $1,908 over the year.
So how can you access a lower interest rate on your credit card?
It’s called a balance transfer and involves moving your credit card debt from one bank to another. The banks will do this by offering you a very enticing interest rate for a period of time, to bring your debt over to them. These interest rates can be as low as 0% and will usually last for anywhere from a few months to two years.
What this means is that you can move your credit card debt to a new provider and reduce your interest rate significantly for a set period of time. This results in your minimum monthly repayment coming down, giving you a period of time to make additional repayments on your card to get rid of your debt.
But buyer beware: Once the interest rate introductory period expires, the debt reverts back to the standard interest rate offered by the bank on their credit cards, which may be more than 20%. This means that you need to be disciplined and work towards clearing your debt within the introductory low interest rate period or consider another balance transfer before the introductory period expires.
To have a look at what balance transfer options are available to you, visit this comparison site – www.mozo.com.au and navigate to their credit card section.
Now that you have lowered your rate, it’s time to get rid of your debt!
As we mentioned above, telling you to pay extra on your credit card debt is neither rocket science or a complex financial strategy. But it is one that works and will allow you to be debt free sooner and ready to focus on wealth creation.
After exploring your balance transfer options and hopefully, significantly reducing the interest rate that you are required to pay, what you want to do then is stay disciplined and allocate the same amount of money each month towards your credit card repayment.
The reason for this is because now that your minimum interest repayments have reduced each month ($204/m down to $45/m in our example), if you continue paying the same amount you were when your interest rate was higher ($204/m), then the difference between the two minimum repayments is what you would be paying off your debt each month ($159/m).
The above example will make a significant difference to the time it will take you to pay off your credit card debt.
Now let’s have a look at another repayment example, to see what the benefits are of making extra payments each month.
In this example we will assume that you have the same credit card as we discussed above. However, instead of paying the minimum repayment of $204/m you pay an extra $100/m on top of this and repay $304/m.
Minimum Repayment Example:
- Credit card debt – $10,000
- Interest rate – 20%
- Minimum repayment – $204/m
- Years till debt is paid off – 61 years & 3 months
- Total funds paid back to the bank – $52,073 (when all the interest is factored in)
Extra Repayment Example:
- Credit card debt – $10,000
- Interest rate – 20%
- Minimum repayment – $304/m
- Years till debt is paid off – 3 years & 11 months
- Total funds paid back to the bank – $14,252 (when all the interest is factored in)
- Extra repayment vs minimum repayment example – $37,821 saving
Numbers have been determined using the moneysmart credit calculator – https://moneysmart.gov.au/credit-cards/credit-card-calculator
The interest saving outlined above is money that you get to keep, rather than paying it back to the bank in interest. This is why it is so important that you consider paying more on your debts each month than the minimum the banks want you repay. Even small amounts of extra repayments can add up to very significant savings for you over time!
The two strategies we have outlined in the article, while not overly complex, are very effective in helping to reduce your debts. They are very easy to do and this can then mean they are also very easy not to do, because they seem so simple.
When it comes to achieving financial success, it is often the result of implementing simple strategies and then following through with them. Getting rid of your debt is no different and we hope that this article has made that clear for you.
I hope this information is helpful and that the strategies we have discussed will allow you to pay off your credit cards in a much shorter timeframe than your current strategy.
Stay disciplined and stay focused and get rid of your credit cards ASAP. Once your cards have been repaid you will have money available each month that you can now direct to saving, investing and working towards your goals.
Ryan Porter is a Wealth Coach at Catalyst Wealth Group. His mission is to help his clients achieve financial success and live their ideal life.
Disclaimer: Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.