9 steps to pay off credit card debt
Ready to get rid of that nasty credit card debt hanging over your head? Sick and tired of worrying about repayments, late fees and the steadily growing balance on your statement each month?
That’s great, but we won’t sugar coat it: paying off a mounting credit card balance isn’t easy. It’s probably going to take a lot of time and effort before you’re free of debt entirely. Don’t let that deter you though - we guarantee being debt free will be worth it in the end.
And to make things a little easier on you, we’ve outlined the key steps you should follow to pay off your credit card debt:
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1. Set your goal.
First things first, sit down and work out exactly how much debt you have. If you have multiple credit cards to deal with, prioritise them in terms of which one needs to be paid off first. Then you can set yourself a goal, which will help keep you motivated and give you a clear idea of what you’re aiming for.
2. Put your plastic away.
Here’s the truth: it’s going to be a million times harder to pay down debt if you’re still spending on your credit cards. So once you’ve started the process of paying off your debt, make sure you take the cards out of your wallet, and put them away somewhere you won’t be tempted to use them.
3. Create a budget.
Now that you’ve committed to paying off your debt, an airtight budget is more important than ever. Start by working out your monthly income, and then identify all your necessary expenses, like rent, groceries, utilities or petrol. Put aside money for these things first - it won’t do you any good to make a big repayment on your credit card, only to find you need to use that same card to pay your rent!
Once you’ve put aside money for the essentials, allocate the rest of your budget to paying down your debt. Your social life might suffer for a while as you tighten your budgetary belt, but just remind yourself how good it will feel to be debt free!
4. Look for spare funds.
Have some extra cash squirreled away? It might be time to bite the bullet and put it toward getting rid of your lingering debt. You might find an extra boost from a tax return, gifts, or your savings. If you’ve been putting money away for something like a holiday or a new car, think seriously about whether that money would be better spent paying off your debt.
You can also make extra cash to put toward your credit card balance by doing things like picking up a side hustle, freelancing or selling unwanted stuff on ebay. No matter how you get it, put any extra money you can toward paying off that debt.
5. Talk to your credit card provider.
Jump on the phone and have a chat to your credit card provider. Most credit card companies have a system in place for when you're having trouble paying your bill, so ask to speak to either customer service or a hardship officer. Let them know you’re having trouble paying off your balance and they might be able to help by lowering your interest for a period, or waving current late fees to give you some breathing room.
6. Refinance your mortgage
Another way to free up some extra funds to go toward your debt? Trim the fat from your home loan. Check out the best home loan offers on the market at the moment, and if you’re paying more than you should be, think about refinancing. Or, if you don’t want to shift your mortgage to a new lender, think about calling your bank and giving haggling a go. You can even use our handy haggling script, or, if you’re not that confident in your bargaining skills, get in contact with Mozo’s resident home loan negotiator, who can help you negotiate a better deal and save you heaps. Then, put all that extra cash straight toward getting rid of your credit card balance.
7. Pay one thing at a time.
The reason it’s important to set a goal and prioritise debts in the beginning, is that one of the best ways to pay down debt is to tackle one thing at a time. If you’ve got a number of credit cards with balances owing, then there are two popular schools of thought on how to tackle them: either pay the one with the highest interest first, or pay the one with the smallest balance.
The first one works because you’ll be getting rid of the debt that will grow the fastest, so you’ll avoid the worst of the snowballing effect. Paying off the smallest balance will work because you’ll see debt disappearing quicker - which is a great way to keep yourself motivated.
You’re the one who knows your money attitude best, so choose the one that will work for you and then stick to it.
8. Consolidate your debt.
The other option to get rid of multiple credit card balances, is to consolidate them all into one easy to manage debt. There are two ways to do this: with a consolidation loan or with a balance transfer credit card offer.
A consolidation loan might be a good option if you’ve got a very large balance, or if you have multiple credit cards, plus other loan debt to handle.
A balance transfer might be better if you just have one credit card and you want to escape high interest, since most balance transfer offers come with a 0% interest period.
9. Have a payment plan
If you opt for a debt consolidation loan, you’ll have a set term and monthly repayments to help you manage paying off your debt.
Balance transfers on the other hand, come with a low or no interest period attached - but when that ends, your interest will go back to being higher until you pay your balance off. That’s why you’ll need to have a plan in place for blasting away your debt within that timeframe. Make a note of how long you’ll have low or no interest, and then you can use our credit card debt payment calculator to work out if your current budget and payment plan will put you in the clear.
Check out the example below:
You can see that by planning to make monthly repayments of $400, this person could pay off their entire balance within the 12 month balance transfer period and avoid paying interest.
If they don’t have this plan in place and make payments of $200 each month, then they’ll still being paying off their debt when the 0% interest period ends, and so they’ll pay hundreds of dollars more than they would have otherwise.
How to stay out of debt
Once you’ve cleared all that debt, the next step is to stay out of it! You didn’t do all that hard work just to stack up another huge credit card balance, did you?
Here are some tips on how to make sure you don’t wind up owing money again.
1. Stick to your budget
After paying off your debt, you should have a pretty stringent budget in place. You can probably afford to loosen the reigns a little now, but don’t do away with your newfound frugality just yet. Keep your budget in place and not only will you stay out of debt, but you might even find yourself with a nice savings stash built up instead. Which brings us to the next tip...
2. Build an emergency fund
One of the quickest ways to wind up with debt piling up is not planning for emergencies, and then having to stick payments on a credit card when your car breaks down, or you get sick, or some other accident happens. Once you’re not worried about clearing debt anymore, turn your sights to savings and start building yourself a nice rainy day fund.
3. Think about closing credit card accounts
After your debt is all gone think about closing down old credit card accounts if you find the temptation to spend too much. After all, you probably spent months, if not years avoiding using plastic while you were paying off your debt - so do you even need them anymore?
4. Choose a better credit card
Of course, credit cards are really convenient and it can be handy to have one or two just in case. So if you aren't ready to swear off plastic just yet, then trade in any cards with high interest rates or steep annual fees for a better deal. You can head over to our credit card comparison table to find a new card that will suit you better.
Not convinced? Check out our Switch and Save calculator to see how much you could save by trading in your old credit card for a better offer.
Find a balance transfer card
Think a balance transfer is the perfect way to blast your debt? You can find and compare options in our balance transfer comparison table.
Find a debt consolidation loan
If a debt consolidation loan sounds like just the ticket to solve your debt problems, then head over to our consolidation loan comparison table to find the perfect option for you.
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