Australians have over $36 billion owing on credit cards where interest is being charged. That’s an average of $4,700 debt per card holder. Are you one of these people?
Don’t let the compound interest inflate your debt over time. If your credit card debt is slowly building up, now is as good a time as any to confront it head on.
The message is clear: Make paying off your credit card debt a top priority. Pay off as much as you can afford, as quickly as possible.
Avoid compounding interest
Let’s say you’ve got a credit card debt of $4,700. If you only make the minimum repayments, it will take 49 years to pay off your card and that assumes you don’t use it anymore. The interest charged over that time would grow to around $14,600. (Assumes 18.5% interest and a minimum repayment of 2%.)
The good news is that with a little discipline you can reduce the debt dramatically. If you pay off $250 each month instead of the minimum repayment, you’ll pay off your debt in two years and save around $13,700 in interest.
By reducing your credit card debt to zero, you’ll save around $800 per year in unnecessary interest charges. That’s money you could spend on things you really want.
I encourage everyone with credit card debt to go to the MoneySmart credit card calculator and see how much money you can save.
If you are serious about tackling your credit card debt, here are the four things you need to do:
- Pay more than the minimum repayment – even an extra $50 per month will make a big difference.
- Stop adding more debt to your credit card. That means you stop using the card as much as possible.
- Set up a direct debit to pay a fixed amount off your credit card balance each payday. That way you won’t even notice the money going out.
- If you have more than one card, pay off the card with the highest interest rate first.
More than one card?
If you’ve got multiple credit cards, once you pay them off only keep the cheapest one – the one with the lowest interest rate or fees. Be sure to cancel your credit cards properly by informing your bank, because if you just cut it them up and don’t tell your bank you may still have to pay fees.
Once you’ve paid off your credit card, consider only using it for emergencies. Also think about using a debit card instead of a credit card for online purchases so that you’re buying things with money you already have.
Australian Securities and Investments Commission