There are good debts and bad debts, and if you have bad debt on a credit or store card or through a personal loan, paying that off should be a priority.
Whether you owe $3000 on one card or tens of thousands over several, plus a car loan, the thought of trying to get out of that hole can seem overwhelming.
But you just need to take things one step at a time.
How much do you owe?
First, work out exactly how bad things are. Make a list of all your debts.
If you have only one credit card it’s pretty simple, but if you have several you need to make a list. Include every credit card and store card as well as any personal/car loans.
Write down the outstanding balance, the interest rate and the minimum monthly repayments.
Add them all up to figure out the total owing.
If you have more than one debt, a common suggestion is to list them in order of interest rate from high- est to lowest.
The idea is that you focus on the debts on the top of the list first.
If two have the same rate, make the smaller balance your priority. Continue making the minimum repayments on any debts low- er on the list.
Once you have paid off the first debt divert the extra money to the next one on the list.
Use the debt snowball method
Another option is to use the snowball method, ranking debts by balance instead of rate.
You then focus on paying the debt with the lowest balance first. Pay as much as you can off that first smaller debt, making only minimum repayments on the others.
Once the smallest debt is cleared, move to the next one.
A big appeal of the snowball method is that as you clear the small debt you should get a strong sense of satisfaction when you cross it off your list.
You really need to pay as much as possible and make your debts a priority, even over savings.
It’s not much use putting money in an account returning 3% when you’re paying 20% in interest on a debt.
Sure, have an emergency fund of a few thousand dollars so you don’t have to rely on your credit card for unexpected expenses but then make your debt a priority.
If you have any “extra” money, use it to pay down what you owe. For example, if you get a lump sum such as a tax refund, put it towards the loan.
Consider a balance transfer
Another option if you have credit card problems is to take up an introductory balance transfer offer with another institution.
A common term is 0% for six months but more institutions are offering longer periods. For example, the St.George Vertigo Platinum card has 0% for 26 months with a 2% balance transfer fee.
As well as the transfer fee, consider the annual fee on the credit card and what rate you’ll be charged when the promotion ends.
The right choice depends on how much you owe and what you can afford to pay each month. And, of course, don’t make any new purchases; just focus on clearing the debt.
Look into debt consolidation
If you have several debts, consolidation might be an option. This involves rolling over all debts into a single loan, whether it’s a personal loan or mortgage.
The best thing about consolidating your debt into a personal loan is that you make one repayment each month instead of several.
You know that at the end of the loan term the debt will be repaid and out of your hair forever.
The other bonus is that you can consolidate other types of debt as well, such as car loans – depending, of course, on the loan amount that is approved.
If you have equity in your home, rolling over the debt into your mortgage is worth exploring. The biggest plus is that a mortgage is one of the cheapest loans you can get.
If you take this route make sure you find out if you’ll incur a fee for topping up the loan.
If you have a small debt and the fees are high it might not be worth it.
It’s also vital to make extra repayments on your home loan to get rid of your debt faster, rather than extending it over the remainder of your loan.
Debt action plan
1. Stop spending on your credit card.
2. Make extra repayments above the minimum set by the financial institution. Make debt repayment a priority in your budget. Treat it like a bill that has to be paid each month.
3. Use your next pay rise to put towards your debt. What you don’t see you won’t miss.
4. Create a debt list so you know where you stand.
5. Work on a budget to get an idea of where your money goes.
6. Consider taking up a balance transfer offer.
7. Consolidate all your debts into one loan – either a personal loan or home loan.
8. If you want to keep a credit card make sure you have the right one for your needs.
9. Reduce your credit limit to a small amount so the potential damage is limited.
10. After your debts are cleared, change your behaviour so you stay out of trouble.
11. Look into life without a card.