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How to cut credit card debt

by Alexandra Middleton | 31 Jul 2013

If you’re one of Australia’s 7,655,000 credit card holders, who collectively owe a whopping $36 billion, cut your debt with these top tips.

Australians have a collective credit card debt of over $36 billion shared across 7,655,000 cardholders. While credit cards are a great resource when large or unexpected bills crop up, if they aren’t paid off and interest is left to accrue it’s easy to lose control. 

As a cohort, over 55s in particular have become increasingly reliant on credit to meet financial obligations. A survey conducted by creditcardfinder.com.au revealed that 17.82 per cent of over 55s have a credit card debt of between $1000 and $3000, 32.41 per cent hold two or more cards, and 12.55 per cent hold three or more cards.

“It comes down to not spending enough time preparing for retirement and instead bridging the gap with credit cards,” says Publisher of creditcardfinder.com.au Jeremy Cabral.

Many older Australians are no longer working and, as a result, have limited cash flow to cover unexpected costs such as medical bills. Some have purposely put off paying off debts until they had access to their superannuation.

An increase in internet usage among over 55s has worsened the situation by making credit even more readily available. “Pre-Global Financial Crisis it became quick and easy to get a credit card, and now people are stuck in a situation where they were approved for a card they can no longer afford to pay,” says Cabral, adding that it may be particularly difficult for retirees to stick to a repayment plan when living off a reduced income or pension.

It’s a fact of life that there are times when the financial buffer-zone offered by a credit card is necessary. However it’s important to monitor spending behaviour so debt doesn’t get out of hand. As a rule of thumb, credit cards should only be used for necessities, not luxury items or retail therapy.

Spending within your limits means you should only charge what you can afford to repay within a two-month period. When applying for a credit card, make a conscious decision about what you will charge to the card and a general plan as to how you will pay each item off and in what time frame.

Common traps

Individuals often come unstuck by having multiple cards all accruing interest. As well as increasing your access to debt, having more than one card means you are paying multiple administration fees.

The notion of only paying your minimum repayment each month is also misleading. As the name indicates, the minimum repayment is the bare minimum an individual must pay to meet the requirements of their contract. Many people believe that by paying the minimum each month they will avoid earning interest, but this is not true.

Paying the minimum simply means avoiding a late fee and being able to continue charging to the card. By only paying the minimum, you will not only pay interest on your months’ purchases, you will also often lose your interest-free days in the following period.

For example, according to NAB, if someone with $1000 worth of credit card debt at an annual interest rate of 18 per cent only made the minimum payment, it would take 12 years to pay off the $1000. Over this time, the cardholder would also have paid $1150 in interest – more than the original debt.

Take action

If you are concerned about your level of debt you need to take action straight away. First and foremost, if possible, refrain from charging anything to your card.

The next step is to approach your bank, credit card provider or financial planner to discuss your situation and find out what options are available to you. This could mean working together to develop a payment plan. By setting a goal and outlining the steps you will take to get there, overcoming your debt won’t seem so overwhelming.

Increasing your regular repayments is a simple and effective way to lower debt. Even if it’s only an extra $50 per month, Cabral strongly recommends increasing your monthly payments wherever you can. “My best piece of advice is to set up an automatic transfer so you don’t have a choice but to commit to repayments,” he says. “Once you pay off a card, lower the credit limit so there’s no temptation to rack up the debt again.”

Balance transfer credit cards can be a great resource for individuals looking to get a handle on their debt within six to 12 months. Offered by numerous banks (but usually not to existing customers), these cards allow you to transfer existing credit card balance with another institution to a card with a much lower rate over a limited period.

Some banks offer transfers at zero per cent interest, however this rate will usually only last for six months before increasing to a higher rate. Banks offer these products for a reason – to attract new customers who may benefit in the short term but will revert to paying interest in the long term. Before you apply, work out whether you can actually pay the debt back within the interest free period, consider any annual fees and compare the interest rate you will pay if you fail to pay it off within the allocated period to your existing rate.

Of course, this will only work as a debt reduction strategy if you close the account you have transferred debt from, otherwise you will only increase your access to debt.