Reduce Credit Card Debt
Reduce Credit Card Debt
How to eliminate debt on your credit card using debt consolidation and balance transfer credit cards
Credit card debt is on the rise in Australia with about 33 billion dollars of debt accruing interest. It is an ongoing concern that Australians must deal with. Part of the problem is that people apply for a rewards card with all the added features and then use it to make their everyday purchases, thus treating the card as an ongoing loan. These consumers would be much better off transferring their balance over to a new low rate card in order to become debt free.
- What is Credit Card Debt?
- Avoid Paying Only the Minimum Monthly Balance
- What is Debt Consolidation?
- Should I Consolidate My Debt?
- How To Consolidate Your Debts Using a Balance Transfer Credit Card
- Best Way to Pay Off Multiple Credit Cards
- How To Take Advantage of The Honeymoon Period
- How To Negotiate a Better Credit Card Deal
- Why You Should Switch to a Debit Card
Low Interest Rate Credit Card Offer
With the ANZ Low Rate you can benefit from a low rate on balance transfers with a low annual fee.
- $58 p.a. annual fee
- 12.99% p.a. on purchases
- 0% p.a. for 9 months on balance transfers
- Cash Advance Rate of 21.49% p.a.
- 55 days interest free
- Minimum Income Requirement of $15,000 p.a.
Consolidate Debt With a Balance Transfer Credit Card:
What is Credit Card Debt?
People were getting into debt long before credit cards; it’s simply that credit cards began to make it easier to spend without having to think about the consequences. That is, until the consequences start arriving in the mail, demanding to be paid. Credit card debt which goes unmanaged and becomes uncontrollable turns into a bad debt. It is a debt which is not increasing in value, is not allowing you to purchase an appreciating asset, but is instead costing you money in interest charges and monthly payments.
Many Australians have more than one credit card with an outstanding balance, sometimes several cards have balances of thousands of dollars in purchases, purchases which were made using the bank’s money, and which now has to be paid back with interest. If you can repay your credit card balance in full before the interest free days available on your card expire, you can avoid these interest charges. However, most people don’t pay off their balance in full each month, and as a result are being charged as much as 18% or even 20% interest on their purchases. While mortgage holders saw some relief as their home loan rates dropped in line with official Reserve Bank interest rates during the Global Financial Crisis, credit card holders did not. This means the interest rates on your credit cards won’t reduce themselves, and you have to actively take control of your credit card debt.
Unfortunately credit card debt is so easy to accumulate because a purchase on credit doesn’t feel the same as physically handing over your hard earned cash and it is easy to forget you have to repay your credit purchases. McDonald’s did their own research in to credit card purchases and proved this fact, finding that customers spent 47% more when they paid with credit, compared to cash.
Australians struggling with credit card debt need to take control of their behaviour, before they can hope to control their debt. Cut out the habits which encourage you to overspend, like paying with credit, and replace those purchases on plastic with a debit card. A debit card acts like a credit card, except it accesses your own funds so there are no interest charges and no monthly payments. To cut down on the interest you are paying on your credit card debt, transfer your debt to a low interest or 0% interest card to make your debt more manageable.
Paying Only The Minimum Monthly Balance Each Month
Calculate the Time it Would Take to Pay Off a High Interest Rate Credit Card Making Only Minimum Payments
As you accumulate more credit card debt and the balances on your cards increases, you may be pleasantly surprised that your monthly repayments don’t seem to be too unmanageable. That’s because the minimum monthly repayments calculated on your credit card balance are only repaying a small percentage of your balance, the rest is going to pay off interest charges. Credit card companies used to calculate monthly repayments as 3 to 4% of the card balance, but many have dropped to charging as little as 1.5%, so your credit card provider can keep you in debt as long as possible.
As soon as your credit card begins to accumulate interest you need to be diligent about paying off your balance before your credit card debt builds and builds. Don’t fall into the trap of spending more on your credit card that you can afford to repay, and don’t be lulled into the habit of just making the minimum monthly payments on your credit card because you will be stuck with that debt for much longer.
Understanding how your credit card repayments are calculated can help you regain control over your debt, and seeing just how long it will take you to repay your debt making only the minimum payments will be enough to inspire you to budget to pay off more each month.
For example, the breakdown of $1,000 credit card balance and repayment schedule looks like this:
- If you have a $1,000 balance on your credit card, your monthly repayment will be on average, 2.5% of your balance, so you pay $25 a month.
- Your payment actually breaks down to cover $13 in interest, with only $12 going towards your balance.
- Making the minimum payments at this rate, it will take you 11 years to pay off your $1,000 debt.
- In those 11 years you will have paid $860 in interest – this is almost double the amount of your original debt.
- On a $10,000 credit card debt you are committed for even more money, over a much longer period:
- Making the minimum monthly repayment on a $10,000 credit card balance will see $133 a month go to interest and just $155 go towards paying down your balance.
- Paying just the minimum each month, it will take you 27 years to pay off your original $10,000 balance.
- During those 27 years, you will have paid $11,000 in interest – that’s a total repayment value of more than twice your original balance.
By simply doubling the monthly repayment amount in both these examples, to $50 on a $1,000 and to $500 on a $10,000 debt, the entire debt would be repaid in two years, saving thousands of dollars in interest repayments. Once you realise just how much you could be paying in credit card interest, you will be able to keep these figures in mind the next time you go to use your credit card, or take the easy option of just making the minimum payment on your monthly credit card bill.
If you can’t repay the entire balance of your card each month, pay as much as you can, or look at balance transfer credit card options which can help you pay less or even 0% interest while you concentrate on paying down your balance.
What is Credit Card Debt Consolidation?
If you have a number of credit cards, then you also have a number of repayments you have to make each month, all coming out on different days, for different amounts. To help you better manage your credit card repayments, you may want to consider consolidating your debts into one repayment, you can also usually secure a lower interest rate than you were paying too.
Credit card debt consolidation allows you to take out a new debt, to pay off your old credit card balances. Your credit cards are paid down to zero and your repayments are consolidated into one monthly bill. You can consolidate your credit card debt by transferring all your balances to a balance transfer credit card offering a low interest rate. Alternatively you can choose to apply for a personal loan to repay your credit card debt, or refinance your mortgage to use equity in your home to consolidate your debts.
Balance Transfer Credit Cards
A balance transfer card is essentially another credit card, but you are being offered a lower interest rate on a balance you are transferring from another provider’s card – or cards. A balance transfer card will pay out the balance of your old cards, leaving them with zero balances, and consolidating them into one balance, and one monthly credit card repayment.
Balance transfer cards can offer you a zero interest rate, but this will be valid for only a short time, and if you are consolidating a number of credit card balances, you probably want more time to repay your balance.
If you can get approval for a personal loan amount to cover the balances of your credit cards, you can use the loan amount to repay your balances to zero, and make one monthly loan repayment. Personal loans can also often offer a much lower interest rate than your standard credit cards had been charging you, and you can choose a personal loan term up to seven years in most cases.
When you apply for a new loan, you may also have to pay establishment fees, as well as show evidence of your earning history and financial situation, to prove you are a good loan candidate. Unlike a home loan where the bank can sell your house if you can’t pay your mortgage, a personal loan is unsecured and you will need to prove you can repay your new loan amount.
Low Interest Rate Personal Loan Offer
Aussie Personal Loan – Over $20,000
Aussie personal loan offer a low interest rate loan. Use your loan for a holiday, home renovations, a special project or even a wedding. It’s even a smart way to take control of your credit card debt.
- Min. Variable Interest Rate: 13.90% p.a.
- Min. Comparison Rate: 14.84% p.a.
- Min. Loan Amount: $3,000
- Loan Term: 1 year
- Application Fee: $199
Refinancing Your Home Loan
Accessing the equity in your home loan to repay your credit card debt can mean you are paying a much lower interest rate on your debt as a home loan interest rate is usually lower than you will find on a personal loan. Depending on the type of home loan you have, you may need to provide additional documentation to prove you can repay the extra amount, and you may need to have your house revalued to confirm the amount of equity available.
While it may be cheaper to increase the value of your loan in the short term, you are essentially adding the value of your credit card debt to your mortgage. That means you will be repaying your credit card debt for the next (usually) 30 years of your mortgage, when you may be better off looking into one of the shorter term credit card debt consolidation options to rid yourself of the debt in its entirety, sooner.
If you are already struggling to pay your credit card debt, you may need to apply for a Debt Agreement or a Personal Insolvency Agreement. These options will consolidate your debts into one payment which is made to a registered financial authority, after you and they have made an agreement with your creditors that you can’t meet your obligations. A Debt Agreement or PersonalInsolvency Agreement allow you to negotiate a repayment amount you can afford, and terms your creditors are happy with, so your credit card providers get their money, and you can avoid declaring bankruptcy.
Should I Consolidate My Debt?
The decision to consolidate your debt should not be one you rush into, because while it may seem like the perfect solution to the struggle you are facing right now in trying to pay down your credit card debt, if managed incorrectly, or if you make the wrong debt consolidation choice, you could be making your financial situation worse in the future.
How Does Debt Consolidation Work?
Consolidating the debt from a number of credit cards means that instead of making individual monthly payments of different amounts on different days to different credit cards, you make on payment, once a month. When you consolidate the debt from your credit cards, the balances on those cards are paid down to zero, and this means you have that credit available again if you need it.
Debt consolidation can help if:
You can’t meet your monthly repayments. If you credit cards are maxed out, or close to their limit, paying them off to a consolidation loan can reduce the repayments you are making and make your debt easier to manage.
You have a bad credit report. If you have a good credit report, you have the option to take out a personal loan to consolidate your debts, but if you have defaults and late payments in your credit history then you may need to consider other debt consolidation options.
You have credit available on a low interest card. If you already hold a low interest credit card with credit available, you can consolidate your cards into the one low interest card with a balance transfer. This will not only save you interest, but will mean one monthly repayment.
You have equity in your home. The equity in your home will allow you to borrow against the value of your home, plus the interest rate on your home loan will be much lower than a credit card or personal loan.
If you already have low interest credit cards or a personal loan, there may not be any lower consolidation rates you can qualify for. However, even if you can’t get a better deal on your current debts, focussing on your repayments and budgeting to repay them faster will save you in interest.
Is Debt Consolidation Right For You?
If you can transfer the balances of your credit cards to one low rate card, or pay of your credit card debt with a personal loan or the equity from your home loan, you need to decide which, if any, is the right option for your situation.
Before you choose a method of debt consolidation, make sure you consider:
- Whether you are eligible, because you don’t want an unnecessary failed application on your credit report when you’re trying to manage our debt.
- Whether you will be paying a lower interest rate.
- Whether you will be able to pay off your debts faster.
- Whether you will be able to avoid late fees because you have just one payment.
- Whether the interest rate is fixed.
Consolidate Your Debts Using an Interest Free Balance Transfer Credit Card
A balance transfer credit card can make it easier to manage and repay your credit card debt, by reducing the amount of interest you pay each month, and allowing more of your monthly payments to go towards paying off your debt. You can even often consolidate a number of credit cards or store cards into one balance transfer credit card, with one monthly repayment.
According to RBA figures, approximately $33 billion of Australian credit card debt is accruing interest and with so many Australians struggling to repay their debt, it is no surprise that there are so many balance transfer options available. A balance transfer card may offer you a 0% interest rate, but this will only be for a short introductory period, where you can choose a slightly higher rate for a slightly longer period, or opt for a For Life balance transfer option where you can earn a low interest rate for the life of the balance.
How to Make the Most of an Interest Free Balance Transfer
There is plenty of choice out there when it comes to balance transfer credit cards as 254 of the 288 Australian credit card providers offer a balance transfer deal. Of those offers, 14 are for a 0% interest rate on your transferred balance, but keep in mind a 0% interest rate will only last for a 4-6 month introductory period, after which your balance will revert to earning between 9.55% and 19.99% which are the rates you have been trying to avoid. Therefore, to make the most of an interest free balance transfer, you will need to be able to repay your balance within, or very nearly within, the 0% interest period.
To pay off your balance faster, you need to make higher monthly repayments than the minimum required on your credit card bill. For example, if you are able to make a payment of an extra $600 a month on your 0% interest balance transfer card, you can repay a $5,000 balance in just eight months – two months outside of the introductory period – and pay just $69 in interest. Even if you can only pay an extra $300 on top of the minimum payments, you pay off your debt in 15 months and pay just $289 in interest. Compare this to paying only $100 extra a month and you will pay $1,097 in interest over 37 months, that’s more than three years showing the difference it makes if you can’t meet the terms of a balance transfer credit card.
Regardless of how much extra you are able to repay on your balance transfer card, your best intentions can amount to nothing if you make purchases on your new card. While your transferred balance will be eligible for a 0% interest rate within the promotional period, that 0% rate doesn’t usually apply to new purchases on the card. These will be charged the standard rate of interest, and your payments don’t go towards new purchases until your old balance is repaid.
How to Choose a Balance Transfer Credit Card
An interest free balance transfer card isn’t for everyone, and you need to look closely at your history of credit card use and repayments to work out whether it is the best option for you. When comparing balance transfer options, consider:
The size of your balance. Knowing how much you need to pay off will help you create a budget, and to be clear on how much you can afford to repay each month.
How much extra you can afford to repay in a month. Budgeting for extra credit card repayments isn’t fun for anyone, but if you can work out what you can afford, it will point you in the direction of the balance transfer card which best suits you; can you pay $600 more than the minimum and pay your balance off sooner, or would you benefit from a For Life balance transfer which gives you more time to pay?
Your credit card and payment history. How likely are you to be able to stick to the payment plan you have created? Work out what you need to do to stay in budget, and whether you can stop using credit for new purchases.
Pay Off Highest Interest Rate Credit Cards First
If you are unable to consolidate multiple credit cards onto a balance transfer card or into a personal loan, then you need to concentrate on repaying the balance of your highest interest rate credit card first. For example, if you have three credit cards, all with the same balance but different interest rates – one with a 10% interest rate, one with a 15% rate and one charging you 25% interest – if you pay the minimum on all your cards, you’ll still be repaying the high 25% interest card for longer. Instead, pay more off of your 25% card each month as this will help you reduce the balance on this card sooner, and once your highest rate credit card is paid off, you can concentrate on your smaller, easier to manage, credit card balances with a lower interest rate.
Pay Off Your Balance Within the Introductory Period
Balance transfer card providers offer attractive low interest rate deals, to encourage you to switch the balance of an existing credit card. Balance transfer credit cards will tempt you with interest rates as low as 0%, which means that an outstanding balance you have on and existing credit card can be transferred, and cease charging you any interest at all.
Just remember that a balance transfer offer this low will only usually run for three to six months. After this time, the standard interest rate, also known as the revert rate, will be charged on your balance. Of course, any new purchases you make on your balance transfer card will have incurred the standard interest rate right away. This is why it is important to compare the standard rate on a balance transfer card too, because it is possible to avoid paying up to 20% interest on your credit card.
So while a balance transfer card is a great way to help you get control of your debt and avoid paying interest on your credit card balance, remember to pay off your balance within the introductory low rate period.
How To Negotiate a Better Deal With the Bank
Finding a better interest rate on your credit card doesn’t mean you have to apply for a new card, or make a balance transfer to a low or 0% interest rate credit card. It is possible to negotiate a better interest rate on your current credit card to allow you to pay less in interest each month, and pay off your balance sooner. Start by following these tips and advice to help you negotiate a better credit card deal.
- Ask and you may receive
The first step to negotiating a better deal on your credit card is to pick up the phone. Make contact with your credit card provider and find out who you need to speak to – that is, who is authorised – to secure a better deal. Remember, the person who answers your initial enquiry may just be the person who can help you, so be polite from the start.
Your bank or credit card provider is still a business, and like any other business, their customers are important to them. As a result, you are just as entitled to ask for a better deal from your credit card dealer, as you are to negotiate a better deal with a car dealer or real estate agent.
- Remain calm and polite
Just because you are entitled to ask for a better deal it doesn’t mean you have to act like it. Always remain calm and polite when you’re speaking to anyone from your bank and they will be much more willing to help you. while your credit card provider is interested in keeping your business, their company won’t fail if you leave, and they are not going to make a loss on your business just to keep you, so you’ll also need to be realistic in what you’re asking for.
- Know what you want, and what you’re likely to get
In negotiating for a better credit card interest rate you may also be able to have the annual fee waived, or better transaction fee deals. However, it is important that you ask for a realistic deal and if you are currently paying 19% interest, don’t expect your provider to offer you a 0% interest rate.
- Make comparisons
Your credit card provider may be able to offer you a better deal straight away, or it may take some haggling to get the deal you want, but remind your provider of better offers you have seen from their competitors, and make it clear you are serious about taking up these better deals. When you point out the lower interest rates or the $0 annual fees of other credit cards you may receive a better deal, but try and hold out for something even better – ask about the payout figure on your credit card because you are considering leaving, and your provider will know you are serious.
- Be persistent
The first offer you get will not be the best deal your provider can do so ask ad ask again and negotiate until the interest rate is lowered or the annual fees are dropped. If you don’t get the response you are looking for, hang up and call again as a different operator may offer you a different deal. Alternatively visit a branch and speak to a manager face to face about products which may better suit you.
If none of these options secure you the deal you want, try explaining that you are experiencing financial hardship, and this is the reason you need a lower interest rate on your card. Banks are obligated to find you a more manageable payment schedule before closing your account and sending in the debt collectors – plus that costs them money too and they want to avoid it – so ‘financial hardship’ may just be the phrase your credit card provider needed to hear to offer you a better deal.
Switching to a Debit Card
The best way to take control of your debt and stop spending more than you earn is to stop using your credit card. It sounds simple enough, but spending only the money which has come in as wages in a week can be a hard habit to get back into, especially if you are used to always having those extra funds on a credit card.
Reacquaint Yourself With Cash
A good way to get back into the habit of only spending what you have earned is to go to the ATM on payday, withdraw a certain amount of cash you think you’ll need for the week and put it in your wallet. Pay your bills and put fuel in the car and when your wallet is empty, it’s empty. In this way it is impossible to spend more than you have earned, the only way you can do that is if you use your credit card – so don’t.
You don’t accidently use your credit card and you certainly didn’t accidentally apply for your card – you filled out a form, you waited for approval, you signed the card and chose a PIN you’d remember. The point is, getting into debt is a conscious decision you are making, and it’s time to change your behaviour. When you attempt to gain control of your personal finance, 80% of the process is about your behaviour; you can choose the right products, get all the right advice, make a balance transfer, but if you’re not willing to make changes to your behaviour then you’re just going to get into the same debt and the same situation all over again.
A Debit Card is Truly Fantastic Plastic
If you need the convenience of a credit card for phone and internet banking, or if you’re just not comfortable carrying around all your cash at once, then switch to a debit card. A debit card looks and behaves just like a credit card, and debit cards are even issued by both Visa and MasterCard. However, a debit card accesses funds in your own linked cheque or savings account, so you are spending your own money, not accruing a balance which has to be repaid. A debit card will allow you to take the same control of your spending because once your bank account is empty, you cannot use your debit card because there are no funds available.
When you link your debit card to your own finances, choose an everyday transaction account, not the account where you keep your emergency fund or deposit your savings. Keeping your saving and your spending money separate will also help you build financial security.
Some debit cards can also act as a credit card too, but if you really want to change your debt behaviours, don’t be tempted to add an overdraft to your debit card. Instead, get into the habit of spending only the cash you have left over after paying your bills and buying your groceries.
Simple Ways To Cut Your Credit Card Bill
Many people wonder how to cut their credit card bill as they sift through their monthly stack. It can be difficult to figure out how you got to the place where you are looking at a bill that is more then you make in six months or even a year.
The fact is that like most people you probably overspent. It is easy to do with the credit card system of buy now pay later. The problem lies in the pay later part. With skyrocketing interest rates you might have no idea how to cut your bill but with some diligence it can be done.
If your intention is to reduce credit card debt, here are a few steps you can take to help you achieve your goal as quickly as possible. This assumes that you are not able to consolidate your debts with a balance transfer to a card with a lower rate of interest.
How to cut my credit card bill:
- Make your payments on time. If you are one of the people, and there are a lot of us, who miss payments regularly or even occasionally it is costing you big dollars. Not only does your credit card company charge you a fee for the missed payment they might also raise your interest rate and put a mark in your credit file. The best way to avoid late payments is to set up a direct debit from your checking account for your monthly credit card bills
- Look into zero percent balance transfers. This is one of the best answers to the how to cut my credit card bill question. If you can qualify for a card that offers zero percent balance transfers then you can take your debt off of an interest bearing card to it and use your money to actually pay the debt rather then the interest. Just read all of the fine print because these rates are almost always introductory so you will want to work hard to pay off the debt before the interest rate reverts back to normal.
- Pay more then the minimum monthly payment. Pay as much as you can each month. Don’t just pay your minimum payment. A $2,000 debt at 20% with a 2% minimum payment will take over forty years to pay back, and cost over $5,000 in interest if all you ever pay off is the minimum amount. Add $50 each month and the debt is gone in three years with just $500 interest to pay. As you reduce credit card debt, so too does the minimum amount become less, but do not drop your payments in response. One of the worst traps of credit card use is only making minimum payments. By doing this it is nearly impossible to make real headway on your debt because once you pay interest and fees each month there is little if any money actually going to the principal debt. Pay as much as you can afford each month and you will start to see a decrease in your balance.
- Assess the damage – Round up all your debt on one sheet of paper, with those debts at the highest rates of interest at the top. These are the ones you need to attack first. Make a note of the minimum interest payments required.
- Stop causing damage – Don’t use your credit cards any more. You can reduce credit card debt by not adding to it. Pay with cash or a debit card only. This will stop more water pouring into your boat as you are bailing it out. It’s your choice whether you cut your cards up or lock them away, just make sure that this particular love-hate relationship stays on the hateful side.
- Use extra cash to pay down the balance – If you are feeling flush one month, use the extra to reduce the debt even more. Do not be tempted to reward yourself with a gift that will only add to your debt.
- Roll over minimum payments – If you have several credit card debts, when one is finished, continue to set aside an amount as though that debt is continuing, only pay it towards one of your other debts as an extra payment. This is a great way to reduce credit card debt as fast as possible.
- Use some savings – This decision should not be taken lightly, and you should never reduce your emergency funding to such an extent that you could not survive for several months if, say, you lost your job. However, if you have an excess in your savings account that you could spare, it will be better off paying down a credit card debt at 15% than earning you interest at 2%.
- Keep your goals in mind – Keep a chart visible to maintain focus, and to help you keep track of how you are progressing.
Stop asking yourself how to cut my credit card bill and start working on the options listed above. The best thing you can do for yourself and your financial security is to get out of credit card debt for good.
Any or all of these simple steps can help to reduce credit card debt. Just remember that the time to start is now.
If you need more information about the types of debt consolidation you are eligible for, and whether they are helpful to your situation, meet with your accountant or financial advisor to find out more.
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