Five steps to get out of debt

Five steps to get out of debt

Falling into debt can happen to the best of us, and it’s an unfortunate position to find yourself in. Whether you’ve racked up a huge credit card bill on your last holiday, or your home loan is getting the best of you, debt is something you can take control of if you follow a few simple steps. 

  1. Highest interest rate first 

If you have multiple sources of debt, your assumption may be to pay the largest debt off first. However, experts believe that you should pay off the debt with the highest interest rate, as the interest will sting you far more than the debt itself. 

Example: Alice has a $10,000 car loan at 6.5 per cent interest and a credit card bill of $5,000 that charges 17 per cent interest. Experts believe she should prioritise the credit card debt, while still maintaining minimum allowable repayments on her car loan. 

  1. Don’t just pay the bare minimum 

If you’re only making minimum repayments on your outstanding debt you’re shooting yourself in the foot in the long term. For credit cards, minimum repayment rates are typically two per cent, or a set dollar amount (around $20). Making higher repayments, or ideally paying off your balance each month, is a key method to get out of debt. 

Example: Alice’s $5,000 credit card bill charges 17 per cent interest. If she makes the minimum repayments on her outstanding balance it would take her 29 years to pay off, and cost her $10,015 in interest.

  1. Switch lenders and save thousands on your mortgage 

If the biggest debt in your life is your mortgage, then you should be interested to know that refinancing your home loan can help you to not only reduce your loan costs but help you pay off your loan quicker. 

There are currently 531 owner-occupier home loans under 4 per cent on the market. If you goal is to pay your mortgage debt off faster, switching to a lower rate lender and maintaining the same amount of monthly repayments can help you to pay your debt off sooner while saving thousands in interest repayments. 

  1. Buy some extra time 

RateCity found that credit card holders who transfer their balance to a new card could save an average of $1,262 in interest and fees, and pay their debt off 6 months earlier*. If you have an outstanding credit card debt you know you can’t pay off this month, but know you could over the next year, a balance transfer might be the solution for you. 

A balance transfer allows you to move your existing credit card debt on to a new card. They traditionally offer zero per cent interest rate options from three months to two years, giving you much needed time to pay off your balance. However, you need to be diligent in paying back your debt. If you don’t pay off your balance in your set time you will be hit with a higher than average ongoing interest rate. 

Also, keep an eye out for credit card providers who charge a balance transfer fee (usually between one to three per cent). There are plenty of zero fee options available, so use credit card comparison tools to find the right balance transfer card for you. 

  1. Seek free advice from government hotlines 

Debt can be an overwhelming and stressful experience that can negatively impact all aspects of your life. If you’re feeling in over your head and don’t want to spend your much-needed money on a financial advisor, it’s worth getting in contact with the National Debt Helpline. They are a not-for-profit service that helps Aussies tackle their debt problems by putting them in contact with professional financial counsellors for free. 

According to Financial Counsellor, Anna Dooland, “when you don’t have enough money, it’s easy to feel like you have nowhere to turn. That’s where we come in: we can give you advice about your options. And the best part? Our services are 100% free.” 

*Figure: average debt figure of $4,225 based on the total outstanding balance accruing interest (source: Reserve Bank of Australia) divided by the number of card holders (Source: Roy Morgan Research). We have made the following assumptions: the $200 is repaid on time, every month, no new purchases are made, interest rates don’t change on your existing card, and the cardholder meets the lending criteria and is approved for the deal.

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Learn more about credit cards

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How to pay a credit card from another bank

Paying or transferring debt from one lender to the other is called a balance transfer. This involves transferring part or all of the debt from a credit card with one lender to a credit card with another. As part of the process, your new lender will pay out the old lender, so that you now owe the same amount of money but to a new institution.

Many credit card providers offer an interest-free period on balance transfers to help new applicants better handle their debt. During this period, cardholders are not required to pay interest on the debt they brought over from the other card. This can be a great opportunity for consumers to pay off credit card debt with no interest. There are often fees associated with balance transfers; normally, these are a percentage of the amount transferred.

So make sure you read the terms and conditions of the card before transferring any debt across.

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

How do you pay off credit cards?

The best way to pay off a credit card bill is to set a realistic spending budget and stick to it. Each month, you’ll get a credit card statement detailing how much you owe and how long it will take to pay off the balance by making minimum repayments. If you only make the minimum repayments, it will take you years to pay off your outstanding balance and add extra costs in interest charges. To avoid any extra charges, you should pay the entire bill. 

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

What is a credit card?

A credit card is a payment method which lets you pay for goods and services without using your own money. It’s essentially a short-term loan which lets you borrow the bank’s money to pay for things which you can pay back – potentially with interest – at a later date. Credit cards can also be used to withdraw money from an ATM, which is known as a cash advance. Because you’re borrowing money from a bank, credit cards charge you interest on the money you use (unless you repay the entire debt during the interest-free period). When you apply for a credit card, the bank gives you a credit limit which sets the maximum amount you can borrow using your card. Credit cards are one of the most popular methods of payments and can be a convenient way of paying for goods and services in store, online and all around the globe.

Which credit card has the highest annual percentage rate?

The credit card market changes all the time, so the credit card with the highest annual percentage rate is also liable to change.

Keep in mind that credit card interest rates are expressed as a yearly rate, or annual percentage rate (APR). A low APR is generally good but also consider:

  • There can be different APR's for each feature of the card (e.g. purchases may have an APR of 14 per cent, while cash advances on same card could have an APR of 17 per cent.
  • Credit cards with a variable rate can change throughout the year, affecting your APR, so check the full details.
  • If you pay your balance in full every month, having the lowest APR is not as important as the other fees associated with the card. However, if you carry a balance from month to month, then you want the lowest APR possible.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

How do credit cards work?

Think of credit cards as a short-term loan where you use the bank’s money to buy something up front and then pay for it later. Unlike a debit card which uses your own money to pay, a credit card essentially borrows the bank’s money to fund the purchase. When you apply for a credit card, the bank assesses your income and assigns you a credit limit based on what you can afford to pay back. At the end of each billing cycle, which is usually monthly, the bank will send you a statement showing the minimum amount you have to pay back, including any interest payable on the balance.