7 ways to cut credit card debt in 2021

Scissors cutting a credit card

Whether it’s to pay for big ticket items or to support yourself through a financial emergency, there are all sorts of reasons why you might be considering a credit card this year.

But while credit cards can help you out of a bind, the flipside is they could also lead you down a rabbit hole of debt, if not managed responsibly. Credit Counsellors Australia’s senior insolvency officer, Matt Shepherd says a mistake many people make is that they treat their credit card as ‘free money’ rather than borrowed money.  

“We find that when people pretend like their debt isn’t there, that’s when it can really get out of hand. Due to interest and things like [late fees], a couple hundred dollars can turn into a thousand dollars very quickly,” he says. 

The good news though is that you can use a credit card without ever falling into debt. All it takes is practising healthy money habits, such as sticking to a solid repayment plan and being proactive with your plastic - that might mean knowing your interest rate, reducing your credit limit or switching to a more suitable card.

We spoke to three personal finance experts about their top tactics for staying debt-free over 2021. Here’s what they had to say. 

TIP #1 - Buff up your budget 

Host of the my millennial money podcast, Glen James says one of the most common reasons why millennials use credit cards or Buy Now Pay Later is because their money management system has stopped working. With too many expenses under their belt, they start relying on credit as a ‘magic diet pill’ solution to cover what they can’t afford out of pocket. 

But the smarter path to take is to go back to the basics: your budget. Your aim when revising your budget is to figure out how you can cover all of your costs without any debt.

Start by jotting down your income and expenses to see if there’s an imbalance in your personal cashflow - are you spending more than you’re earning?

Expenses vs income: do yours balance out?

NOTE: Total expenses should be less than total income.

Then, look for opportunities to lower your current costs as much as possible. Perhaps it’s cancelling that gym membership you never use or moving to a cheaper energy plan. Read up on some other expenses to ditch in 2021.

TIP #2 - Put your needs first

If you’re still having trouble shrinking down your expenses list, then this next tip could be very useful: know the difference between your ‘needs’ and ‘wants’.

“Some costs in life are essential - housing, groceries, bills, medical expenses - while others are luxuries or a lifestyle choice,” says James. 

In other words, you could probably hold off on buying another pair of sneakers but you can’t live without things like electricity and shelter. 

That’s not to say you shouldn’t dedicate a part of your income to ‘fun’. In fact putting aside funds for non-essentials like eating out and entertainment is crucial to making your budget realistic. 

Credit Counsellors Australia’s Matt Shepherd says setting a monthly limit for the fun stuff (say, 15% of your income) can also help you prioritise your wants based on what’s most meaningful to you.

Budgeting 101: how to divide up your income

NOTE: This is known as the ‘50/30/20 rule’ but the percentages can be adjusted to suit your situation. E.g. For a tighter budget, you can dedicate less of your income (say, 15% instead of 30%) to wants and more to savings or needs.

TIP #3 - Build a savings safety net

2020 has proven that financial difficulty can happen to anyone, anytime. However if you aren’t prepared for those unforeseen circumstances and turn to credit cards for help, you could end up getting stuck in debt.

To prevent that scenario, James recommends building an emergency savings fund - “your own safety net that doesn’t involve debt”. This is a money bundle solely designed to support you through a challenging time, giving you breathing space to get back on your feet. 

As a rule of thumb, your emergency savings fund should cover your essential costs for at least three months. But remember not to overdo it - stash away just enough for a rainy day, without neglecting other financial goals like making super contributions or saving for a home deposit. 

Looking for a place to park your emergency fund? Even in these historically low-rate times, the right savings account can still see you earning above 1% interest (or up to 3% for youths). Explore your options over at our savings account comparison hub.

TIP #4 - Cater to your money personality 

What’s your ultimate financial guilty pleasure? Perhaps you get tempted by Instagram ads, or maybe you’re the type who can’t say ‘no’ to a discount.

Whatever your bad money habits may be, knowing them is the first step to curbing them. In James’ words, it’s about asking yourself: “how can you hack the way you spend money to stop the usual habits in their tracks?” 

Here are a few quick strategies to help you put a lid on overspending and avoid falling into the debt cycle: 

  • Stay away from online shopping: “Online shopping can be great, but because you don’t physically see your money being exchanged it can feel like it’s ‘free’ stuff,” says James. He recommends simple remedies like uninstalling your shopping apps and steering clear of your favourite retail websites.
  • Avoid excuses like "but I'm getting paid tomorrow": It can be tempting to use the days leading up to pay day as an opportunity to spend beyond your means. But remember: if you don't have the money right now, then you can't afford that purchase. As James says, "Why spend your future wealth? You're putting yourself in debt before you're even paid!" 
  • Switch back to debit or cash: Nearing your credit card limit? Then it may be time to put that plastic away and return to physical cash or debit cards for a while. Co-founder of financial consultancy Debt Busters, Wei Tang says “this method will help [people] realise money is finite and hopefully, help them better manage their available funds.” 
  • Better still, lower your credit limit as a preventative measure, so you won’t be tempted to spend more than what you can repay. 
  • Get an accountability partner: It can be challenging to keep yourself in check, which is why you might want to recruit a trusted someone to help keep tabs and rein in your spending if needed. 

TIP #5 - Have a repayment plan 

While you could be forgiven for missing a credit card repayment here and there, a key to not falling behind and causing debt to potentially snowball is to have a plan in place. 

According to Shepherd, there are many ways to approach your repayment plan, and the right one depends on your situation as well as whether you have one or multiple credit cards: 

  • Work your repayments into your budget so you know they’re being addressed. They should go under your ‘needs’ or ‘essentials’ category. 
  • Take advantage of interest-free days on your card (usually 44 or 55 days from the start of your statement period) and match them to your pay cycle. That way, you can make expenses throughout that period, knowing you’ll be able to settle your account once your next paycheck comes through. 
  • If you have multiple credit cards, prioritise them - either clear the one with the smallest balance first, or the one with the highest interest rate. As for the rest, if you can’t afford to pay them off in full this month, focus on making at least the minimum repayments to avoid late fees. 

TIP #6 - Stick to one credit card 

When it comes to the number of credit cards you have, less is certainly more. With just one plastic in your wallet, it’s a lot easier to keep track of what you owe. 

“We can see that a lot of people, especially younger people, can have anywhere between five to 15 loans,” Shepherd says.

“[However it’s wiser] to go to a place that can give all the requirements you want at a lower interest rate, instead of going to multiple different places that all charge high rates and late fees.” 

So if you need a credit card, Shepherd recommends thinking long term about it. How will it improve your financial situation in the long run, whether it’s boosting your credit score or supporting you through an unexpected expense? Are you picking a plastic that could also serve your future needs?

Remember though that you aren’t locked in. You can always cancel your current card and refinance to a better deal. If another creditor is offering more attractive rewards, lower interest rates, smaller annual fees or a longer interest-free period, you have no obligation to stay loyal to the initial provider you signed up with. 

Curious to see what’s out there in the market? Compare today’s offers over at our credit cards comparison table.

TIP #7 - Share your money worries

While Aussies have grown more comfortable having money conversations since the start of COVID-19, debt remains one of the least popular topics to talk about. 

But Tang says, “even just talking with trusted people about our problems always helps us feel less stressed.” 

For those really starting to struggle, Tang urges them to seek out a specialist like a financial counsellor or debt management consultant (there are many free options in Australia). 

They will help you “[calculate] your inflows and outflows and go through the steps that can be taken to escape the cycle of debt,” he says. 

If you're experiencing financial hardship due to the pandemic, check out what support is currently available. Or read our guide on how to pay off credit card debt in nine steps.