CREDIT CARD CRUNCH
Getting into debt can be a bit like stepping into quicksand: before you know what’s happened, you’re up to your eyeballs and feel helpless. But it doesn’t have to be that way. We've outlined some strategies you can use to climb out of the debt cycle, and precautions you can take to make sure you don’t get into a similar situation again.
Step 1: Hide your cards
Firstly, let’s stow away those cards somewhere hard to reach at home, so you’re not tempted to put any new charges onto them.
Step 2: Do a Budget and stick to it
This can be a bit daunting, but you need to look at everything you owe and work out which debts are costing you the most money. This is best done in a budget which tracks money coming in and out (ie where its going). ASIC Moneysmart have a great one.
Step 3 - Pay off priority debts first
Once you’ve provided all the details we can suggest a repayment plan. The debt attracting the highest interest rate (at the top of the table) is the one we recommend you make additional payments on first. When the entire debt is paid, update your details so we can update our advice about where your additional repayments should go next. Keep following these steps until the lifestyle debt is gone. During this process, we recommend you keep repaying the minimum amount on any other lifestyle debt you have.
Step 4 - Try not to add to the debt
Next up is probably one of the hardest steps – putting your cards out of sight. We don’t want to add to them – otherwise it will feel like we’re chasing our tails. If possible, consider:
Stopping direct debit payments on your credit cards. Have regular expenses debited from your bank account (preferably where your salary is paid into so all that remains is what you have to spend until next pay)
Using cash or save up for something.
Step 5 - If you're paying more than minimum across a number of cards - reprioritise
If you’re currently paying more than the minimum amount across a number of cards, you can combine these extra amounts of money and put it all towards paying off the debt sitting at the top of the table – the one with the highest interest rate. You will notice we have done this automatically in the table under the Revised Monthly Payments column. We just need to make sure you’re still paying the minimum amounts on all other debts each month.
Step 6 - If you're only paying off the minimum across all your cards...
Let’s get serious here for a moment. If you’re currently only paying the minimum payment across all debt owing, that debt is not going away anytime soon. This is the part where you’ll need to commit other savings or reduce future expenditure to debt elimination. Yes, that means cutting back – but you will see the light at the end of the tunnel very quickly. Even a modest additional amount directed to debt elimination can make a big difference over time. Using this approach you’ll see that the debt at the top off the table gets paid down quickly. Great news!
Step 7 - One's paid off, now it's on to the next
Once that debt has been paid off, then what? We’ll take all the money you were using to pay off that debt and direct it to the next debt on the table. So you keep paying the minimum plus all the extra cash you were previously using to pay off the top card. You’ll start to see this debt decrease really quickly! If you have more than two debts we’ll keep repeating this process until all of them have been paid off.
Step 8 - Once these debts are gone, move on to another goal
Once the debt is eliminated, re-direct the money you were using to repay lifestyle debt towards another goal. But along the way, you can reward yourself for a good job done well. If you want to, take 20% to 30% of the monthly amount you were using to pay off the last debt into your monthly spending allowance. We think it’s important to reward yourself! The rest of it (or even 100% of it) will then go towards building up your emergency fund to help ensure you can meet any of life’s little hiccups that may come your way, without having to use your credit cards again. Great news is that you are on your way to financial health and getting stuck into your goals!
Credit card smart
You’re more likely to avoid costly mistakes with credit cards by setting yourself some guidelines like:
Chasing points could cause you to spend more than normal resulting in high fees and interest. Keep calm, pay off, cancel online and move on.
Pay your credit card on time to minimise the interest being added to the outstanding balance.
Monitor your transactions and check your statements. This helps maintain a healthy Budget and minimise fraud (report transactions you didn’t make).
Prioritise repayments. Maximise payments on the most expensive credit card, maintain payments (at least the minimum) on other debt you have.
Make headway using spare cash for mid-month payments when you can.
Set a sensible credit limit. Don’t be flattered by an offer to increase it. Assess your needs first. Accept, alter or ignore.
Don't use credit to make ends meet if you can’t pay off the outstanding balance each month. Return to cash for spending. Use credit cards for regular deductible expenses (ie direct debits).
Be weary of store card offers. Take the form home and compare the market before you sign up (they’re expensive compared to other types).
Close your credit card properly when it’s paid off and you don’t want it anymore (protect yourself by chopping it up into very small pieces and scatter in several bins).
The information in this article and any links provided are for general information only and should not be taken as constituting professional advice from the magazine publisher, article author and/or the organisation using this publication as their own (WE). We are not financial advisers. You should consider seeking independent legal, financial, taxation or other advice to check how the article information relates to your unique circumstances. We are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.
By: Phillipa Billings - Tax Financial Adviser, Registered Financial Adviser, SMSF Accredited