Before we detail the seven steps, we should point out that getting out of credit card debt does not come with a one-size-fits-all solution. The right approach for you will depend on many factors, including your level of debt, income and any other outstanding debt you have. But working through any debt scenario logically, and with a step-by-step process, can definitely help. Here are Canstar’s seven top tips for getting out of credit card debt.
Step 1: Work out how much debt you’re really in
Add up how much total debt you have across any credit and store cards. Then write down that number on a sheet of paper. Seeing the figure in black and white can be the wake-up call you need to put a debt-busting plan in motion!
Step 2: Pay all expenses from your transaction account
While you’re working out how to pay off your credit card debt, stop adding to it! Consider getting a debit card, which has the same benefits of a credit card in terms of bill payment except that you’re using your own money. You can use cash to pay expenses in the interim.
Step 3: Pay your important costs first
When your salary hits your bank account, use the money to pay for your essentials first. Make payments for your mortgage/rent, buy groceries and pay for utilities – such as electricity, mobile phone and petrol – before you pay for anything else. Otherwise, it can be easy to spend your cash on more interesting (and possibly regrettable things) – and have nothing left for the bills you need to pay.
Following this strategy will reduce the chance that you’ll get caught short and have to use your credit card.
Step 4: Write a budget
Knowing what expenses you need to pay over the course of a year helps to ensure that you have savings put aside for those big occasional costs (such as car registration and insurances).
This way, you can try to prevent being caught short. Give Canstar’s budget planning calculator a try.
There are also free resources available that can help you set your financial goals. While it’s common to start a new year with gusto and determination to be smarter with your money, maintaining this enthusiasm throughout the year can be challenging. Using tools, such as the Ministry of Social Development’s financial goal setter, can help to keep you on track.
Step 5: Minimise the interest on your debt
If you have a large credit card debt, chances are the cost of your credit card interest is also high.
One option to deal with credit card debt is to sign up for a balance transfer deal. This is when you transfer your credit card debt to a new credit card. Often, you can get competitive interest rates by using this debt management strategy. Just watch out, though. Generally, this lower rate will only apply for existing debt, not for any new purchases you make on that credit card. Also, the low interest rate will be set for a fixed period. After that ends, the interest rate will often revert to a considerably higher level. So you want to make sure you smash as much debt as possible while the rate is low. Before signing up to any balance transfer credit card, read the fine print carefully.
Step 6: Set up a repayment plan
Whether you switch credit cards or not, set up a regular repayment plan to pay off your debt as soon as possible.
If you’ve created a written budget, you’ll know how much cash you’ll have left over to put towards your credit card debt each month. Don’t get discouraged: the debt probably took a long time to build up and it may well take a long time to pay off. Every six months or so, as you pay down the debt, compare credit card interest rates, review your interest rate and see whether there is a cheaper option available.
Step 7: Ask for help
Importantly, don’t hesitate to ask an independent third party to sit down with you and help you work through all of the above. FinCap is a free New Zealand-based budgeting and financial services organisation. FinCap can help direct you to a local financial mentor, who will provide free and confidential budgeting advice. A financial advisor could also help to run you through financial tools, such as the goal setter that we mentioned in step four.