There’s no right or wrong way to tackle credit card debt. But working through any debt problem logically and in a step-by-step process can certainly help. So here’s our plan:
Step 1: Set a goal
The first step is to take a close look at your debt. How big is it and where has it come from? If you have a number of credit cards, work out which one needs to be prioritised. From there, you can set yourself a goal and a clear idea of what you’re aiming for.
If you have more than one credit card, there are two ways to approach your debt. The first is to pay the one with the highest interest first. The other is to pay off the one with the smallest balance first.
The first option stops your debt from growing due to its snowballing effect. However, the second option can be more motivating, as you see your debt disappearing faster, which is a great feeling.
Step 2: Stop the habit
A swipe of the card for shoes here, a yoga membership there, a lunch with colleagues … small purchases add up. Often pulling out a credit card to swipe or tap is simply a bad habit. Leave your credit card at home and use your debit card instead. Only buy what you can afford today, don’t leave yourself with future debt.
Examine and pick apart your monthly expenditure. Go back over a few credit card statements and look for unnecessary spending, or areas where you can cut back. Do you have any regular payments that you can cancel?
Put an hour aside to draw up a budget. Then apply the money you save from your economising to reduce your credit card balance.
It can certainly take a while to get your credit card balances back to zero. After all, debt can take a while to build up in the first place. But the earlier you make a start, the sooner your debt will clear.
Step 3: Pay more than the bare minimum
Your credit card debt won’t shift if you’re only paying the bare minimum at the end of every month. Essentially, minimum payments are actually just paying off some of the interest. Making minimum repayments does not make a dent in your actual balance. Pay off a little extra every month, and you’ll be happy to see your balance shrink.
Step 4: Make use of your savings
You may be hesitant to empty your savings account for the sake of paying off a credit card balance. But consider the fact that any interest you earn on those savings will be much smaller than the money you’ll end up paying in interest on your unpaid card balance.
Step 5: Consider a balance transfer
Many financial institutions offer balance transfer deals – essentially a credit card with a low introductory rate. Rates can be as low as 0% for 12 months, or sometimes the life of the entire transferred balance.
However, do be aware that credit cards offering a balance transfer deal tend to revert to a higher than average interest rate once the deal period lapses. So, make sure you carefully check all the terms and conditions, to avoid any nasty surprises down the line.
If you are looking for a new credit card, then let Canstar be your guide. Perhaps you want one with a low interest rate, or low fees, or want to swap to change your rewards card from points to cash.
Our free credit card comparison tool compares all the major cards in the market and awards the best our prestigious Star Ratings. For example, the grid below shows a snapshot of the low-interest rate credit cards currently on Canstar NZ’s database, based on a spend of $3000 per month. For more information on credit cards and to compare further, just click on the big button under the table.
Choose a low rate card. Unless you are on a super-low rate already, you could probably save money by changing your card. The lower the interest rate the better – that means more of your payments are going towards clearing your debt and not paying interest.
You could also consider consolidating your debt into a personal loan. This is a more structured way to clear your debt and will ensure that your debt disappears gradually over the fixed term of the loan.
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